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04

FR O M T HE EDITO R

Odds shorten on consistent view
W

hen the Prime Minister, Julia
Gillard, announced her new-look
ministry, one question immediately ran through
the financial planning community: Who is Bill
Shorten?
For the past three years or so, the financial
services sector has been well served by Chris
Bowen. While proposals and reforms put forward by Bowen were not universally embraced,
very few people really believed he’d done a bad
job as Minister. They might not have agreed with
the policies he formulated, but his approach was
consultative and inclusive.
You only had to be at the Financial Services
Council (FSC) national conference in August
to understand how much that approach was
appreciated. FSC members aren’t necessarily the
Labor Party’s natural constituency, yet there was
widespread acknowledgement that Bowen’s ap-

proach to his portfolio had been highly effective.
And there was a pronounced difference in
the performances at the conference of Bowen
and his Liberal counterpart, shadow Treasurer
Joe Hockey. Bowen offered a vision and longterm policy framework for financial services;
Hockey offered no long-term, coherent vision
for financial services policy. The FSC conference
heard a lot about what a Coalition government
would not do, but not a lot about what they
would do.
Partly that’s a benefit of incumbency: it’s
easier to outline what you’re going to do once
you have all the tools and resources you need to
actually do something. Even so, a change of government, and a radical change in policy, wasn’t
something people in the conference audience
were crazy about.
Before the election, a member of the FSC

board told me he believed the worst outcome for
policy continuity would be a change of government and a new minister; the second-worst outcome would be the Government returned, but
a new minister; and the best outcome would be
the Government returned, and Bowen remaining
in the portfolio.
So Bowen’s move to the Immigration portfolio has got the industry wondering what to
expect from his successor, Bill Shorten.
At least we have continuity of government,
more or less. It remains to be seen how effective
a minority government actually can be, but we
can’t say we don’t know what the broad policy
agenda is.
Where Shorten may differ from Bowen is on
his views of the details – things like commissions
on risk products, the opt-in proposals, and the
banning of all forms of volume rebates.

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FR O M T HE E D I T OR

Shorten’s appointment has been received
predictably by the industry. The Association of
Financial Advisers (AFA) said his “experience
during the Beaconsfield mine disaster in 2006
means he is likely to have exceptional insight
into life’s uncertainties”. The subtext here, one
supposes, is that the AFA hopes Shorten will be
well-disposed towards life insurance.
And the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) hopes
Shorten will look favourably on superannuation: “We note and support Minister Shorten's
comments that improvements to superannuation
represent an opportunity to increase the quality
of life of all Australians and deliver us a sustainable future,” SPAA said.
“We are confident Mr Shorten's background
as trustee of two superannuation funds will
stand him in good stead in his new role developing policies to benefit the broader retirement
savings sector.”
Although Shorten appeared at the FSC
conference, in a session opposite the Coalition’s
Kerry O’Dwyer, we still don’t know a lot about
how he’s likely to approach the job.
Shorten represents Maribyrnong, in Melbourne’s north-west, and he was re-elected with
55 per cent of the primary vote there (translating

to 65 per cent on a two-party preferred basis).
He was educated at Xavier College in Melbourne. He has a law degree and an MBA. He’s
a former national secretary of the 135,000-member Australian Workers’ Union (succeeded by
Paul Howes). He’s one of the “faceless men” that
the opposition is fond of referring to as being
responsible for the overthrow of Kevin Rudd.
And, of course, he’s the son-in-law of the Governor General.
Bowen will be a tough act to follow; but the
fact that the Prime Minister has appointed to
this portfolio one of the Labor Party’s rising stars
shows that it’s certainly still being paid the attention it deserves.
But the proof of any pudding is in the eating;
in the weeks and months ahead, Shorten will
be on a steep learning curve as he grapples with
the intricacies of his new portfolio and with the
reform agenda (and its reception). He has a relatively short time to win the trust and confidence
of the industry.

***

Speaking of new faces, there’s one at Professional Planner. On September 6, Krystine
Lumanta joined the magazine as a journalist.
Krystine is currently completing a journalism degree, and has experience in superannuation fund
administration. She’ll be writing for both the
magazine and our website, Professional Planner
Online. Krystine will be out and about, meeting
people in the industry and attending conference
events. Keep an eye out for her, and say hi.
Simon Hoyle
simon.hoyle@conexusfinancial.com.au

orporate collapses are a fact
of life in the modern economy. Thankfully they don’t happen too
often. But they do happen, and even
the best financial planners may have to
deal with this issue during the course
of their professional career.
It is particularly difficult when
the collapse affects a financial planner’s clients who relied on the advice
of their expert adviser to participate
in the product. Retaining the client’s trust and confidence through a
corporate collapse and bringing them
safely to the other side is critical. A key
but challenging part of this is in to put
your own financial concerns aside to
ensure your client’s financial interests
are protected and that they get access
to appropriate avenues of recourse.
The first port of call for any avenue
of redress is the product provider. Not
only is it generally a requirement of
industry external dispute resolution
schemes that the complainant utilise
the company internal dispute procedure first, but this will also assist in
ensuring the client is identified for any
future action that may arise through
administration of the company.
The next step is taking it to the
appropriate external dispute resolution (EDR) scheme for the product.
This might typically be the Financial
Ombudsman Service (FOS), which
doesn’t just deal with complaints
against financial planners, but also
handles complaints in relation to
almost all forms of investments, insurance and superannuation.
Whilst there are recognised
monetary limits to FOS’s capacity to
award compensation, they can at least
respond to the complaint; and in doing

so, this will further enhance the client’s
rights if any future administration
action arises.
However, claims brought after
a company has gone into external
administration may be barred from
recovery.
Client concerns should also be
lodged directly with ASIC, because
they obviously handle complaints
where breaches of the law are evident.
They are also likely to be the agency
that formally triggers administration
action, and so it is helpful for clients to
be identified to them.
By itself though, ASIC notification
is not automatically a path to financial
recovery. It needs to be accompanied
either by creditor action, individual
(or class-based) civil action or, in cases
where ASIC thinks it is in the public
interest to do so, they have the power
to initiate their own Section 50 action.
In all of these cases, the financial
planner may be called upon to liaise
with the administrators and investigators, and may have a role in referring
their affected clients to lawyers with
suitable expertise.
Sometimes, of course, the financial
planners themselves become the
subject of investigations, in which case
it may not be appropriate or ethical
for them to be seeking to represent
affected clients. In these circumstances their clients’ interests may be
best served by seeking advice from
another professional who can offer
an independent view of the situation.
It also pays for financial planners
to understand the terms of their or
their licensee’s professional indemnity
insurance policy and how it may limit
their capacity to communicate with

their clients. The planner’s ethical and
professional obligations may be in conflict with obligations to their employer,
their licensee, and/or the commercial
interests of their insurer.
When it all boils down, suffering
financial loss from a product collapse
is a tense and stressful issue that has
the potential to destroy the client’s
(and the financial planner’s) trust in
the financial services marketplace. At
times like this, living up to the promise
of being a trusted professional requires
the financial planner to draw on all
their skills of professional advocacy
and sensitivity; and, above all else, it
requires us to focus on the needs of
the client without regard to our industry’s or our own financial consequence.
The fact that it happens at all
suggests that we should consider
developing an action plan to kick into
place for affected clients. This should
be designed around the specific needs
of clients.
Improving product regulation
and gatekeeper regulation is a central
part of our Future of Financial Advice
(FoFA) taskforce considerations. In
the meantime, financial planners who
are confident in their original recommendation and the research strength
behind it, and those who genuinely
follow the FPA Code of Professional
Practice, will have greater confidence
that their recommendation was appropriate at the time it was made.
To comment on this article go to
.
www.professionalplanner.com.au
Deen Sanders is deputy chief
executive and head of professionalism
for the Financial Planning Association
of Australia

Sanders

Dealing with a collapse

Deen

C O L U MN

07

A

foundation of any functioning market is the ability of
participants to compare the cost and
value of similar products or services.
Transparency is critical both to protecting consumers and to encouraging
competitiveness and innovation. Imagine a circumstance where the quality
of a product or service diminished as
price increased.
In many markets, the ability to
compare is complicated by product
differentiation, the value attached to
a specific brand by consumers, or the
complexity of the product or service.
The superannuation industry is
not short of ratings agencies or methods to compare fund performance,
and the recent Cooper Review has
considered the issue at length.
There are currently two broad approaches to. The first presents returns
to members net of tax, investment
management fees and implicit assetbased fees. This model is preferred by
industry super funds.
The second presents investment
returns net of investment management
fees and tax only. The emphasis here
is on comparing products with similar
risk profiles, rather than capturing
asset-based administration fees or
commissions for financial advice. This
is the model preferred by retail super
funds.
APRA’s whole-of-fund rate of
return (ROR) is more aligned with the
first method, in that it represents the
net earnings of superannuation assets
towards funding members’ benefits,
primarily for retirement. APRA’s
ROR measures the combined earnings of a superannuation fund’s assets
across all its products and investment

options.
Notwithstanding the different
merits of alternative rating methods,
it is clearly time for the Government
or regulators to determine a single
method that fund members and
financial planners can rely upon when
comparing the cost and value of competing super funds.
The Cooper Review gave this issue
some thought, noting that while most
members are not currently seeking this
comparative data, there is a range of
industry stakeholders who are. Their
conclusion was that:
“It is illogical and misleading for
investment returns to be reported to
members on anything other than an
after-tax basis and after all costs have
been deducted.”
Industry super funds have long
advocated a method called “net benefit
to member” (NBTM). It is also called
the “bang-for-your-buck” measure.
This measure demonstrates the net
interest received by a member for
every dollar paid in fees over an agreed
period (say, five years or longer). Tax is
also deducted. The NBTM measure
can adopt either standard industry
assumptions (for example, those used
by ASIC) or assumptions more applicable to the situation of individual
members.
The NBTM measure could be
presented on each member’s statement with a comparison to the median
NBTM achieved across the super
industry, using modelling provided by
the regulator. This comparison would
of course be indicative, but alternative
modelling (reflecting differences in
the size of account balances) would
be simple to provide for comparative

purposes.
Supported by the publication of
APRA league tables in newspapers
and online, the NBTM would greatly
enhance the ability of members to
compare the relative performance of
their super fund. This would in turn
encourage member engagement.
The NBTM measure is more
consistent with existing and proposed
regulatory requirements than other
methods that exclude ongoing assetbased fees. ASIC already requires
superannuation trustees to include the
amount, frequency and negotiability
of fees via a “fees and costs template”
in their product disclosure statements
(PDSs). Further, the Government’s
proposed Future of Financial Advice
reforms impose a statutory fiduciary duty on financial planners, which
will compel them to recommend only
those products that are in the best
interests of their clients. If superannuation funds start to report returns
gross of administrative and advice
fees, it will be much more difficult for
professional financial planners to calculate and disclose the dollar impact
to clients of switching to an alternative
product.
The “net benefit to member”
method will enable consumers to
measure the “bang-for-their-buck”
from both their fund and financial
planner, increasing competition and
ensuring that the best performers are
rewarded.
To comment on this article go to
.
www.professionalplanner.com.au
David Whiteley is chief executive of
Industry Super Network

Whiteley

Comparisons essential

DAVID

08

C O LU MN

T

he findings of a new SelfManaged Super Fund Professionals’ Association (SPAA) adviser
survey shows SMSF professionals are
strongly behind policy measures to
raise professional standards and the
quality of financial advice. The findings
are not a surprise, as SPAA has long
been an advocate of high professional
advice standards in the SMSF sector.
Our survey of more than 300
SMSF professionals, including accountants and financial planners, took
place during the recent SPAA Technical Conferences and reflected strong
support for SMSF/Australian Artists
Association guidelines on ownership
of artwork; a restricted licence for
accountants who advise on SMSFs;
and registration of SMSF auditors by
ASIC.
The survey findings also confirmed that many SMSF practices
have already embraced the proposed
new fee-for-service regime (ahead of
a Government plan to ban commissions from July 1, 2012) with only 29
per cent of respondents stating that
the Future of Finance Advice reforms
would represent a significant change to
their businesses.
SMSF professionals also backed
the raising of adviser competency
standards through the proposed Future
of Financial Advice reforms (93 per
cent), while 60 per cent of respondents agreed SMSF auditors should be
registered with ASIC.
As a best practice measure, 93 per
cent of our respondents said fee-forservice should be agreed with the client
in advance while 79 per cent said different charging regimes should apply for
different types of advice. Interestingly,

more than three-quarters (79 per cent)
of respondents said advisers should be
able to charge upfront fees from clients’
investment funds with the agreement
and direction of the client. However,
respondents rejected a model that
involved charging all fees on an hourly
basis only, with 73 per cent against.
Summing up, SMSF professionals
want a choice of remuneration methods agreed to by the client in advance.
SPAA also supports this model, while
opposing embedded fee arrangements.
On the Government proposal
to remove the current “accountants’
exemption” for advice on establishment
of an SMSF, less than half (43 per
cent) of our respondents agreed with
this; but more than half (56 per cent)
did support a restricted licence model
favoured by SPAA, which would provide SMSF professionals with clarity
around advice for set-up of a SMSF.
Only one third (33 per cent) of
respondents agreed that financial
planners should become registered
tax agents to provide incidental tax
advice. With more than half the survey
responses from financial planners,
it’s pretty clear that planners see the
tax agent measure as a backward and
unnecessary step for their businesses.
Most of those surveyed favoured a
restricted tax agent registration for
financial planners, which would cover
their ability to provide incidental tax
advice.
The Australian Artists Association/SPAA art guidelines were a
popular development, with more than
80 per cent of those surveyed believing
the guidelines are necessary to ensure
members do not derive a personal
benefit from the assets of their fund.

These guidelines were designed so that
SMSFs could continue to invest in artworks. Only 15 per cent said that the
guidelines were too onerous and just
under half (47 per cent) of respondents
were undecided about the likely impact
of the cost of holding artwork and
personal use assets in a SMSF.
Given SPAA’s view about the need
for higher professional standards,
SPAA has been an active contributor
to the reviews that have affected the
SMSF and broader superannuation
sector over the past few years. These
include the Superannuation System
(Cooper) Review and the Future of Financial Advice reforms. Today, SPAA
stands ready to work with all parties to
provide policy support and solutions.
Separately, I have undertaken to
write to some of the key new independent members of Parliament. My
purpose was to highlight SMSF issues,
like the superannuation contribution
caps, which may directly affect their
constituents.

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Over the past two years, Professional Planner Online has

specialists. And we have a range of developments in the

established itself as an invaluable addition to Professional

pipeline to improve the interaction and community aspects

Planner - the leading magazine for Australia’s fee-based

of the website.

financial planning community. The website has been a
source of news and information between editions of the
magazine. It has broken crucial industry news, and provided

One thing has not changed: Our aim is to be as useful and
supportive as possible to financial planners, accountant

a forum for interaction between readers.

planners, private bankers and SMSF professionals in

Now we’ve made it even better.

developments in legislation and regulation, and in staying

With a new, cleaner look, easier navigation and improved

running their businesses, in keeping abreast of changes and
on top of the latest industry developments.

grouping of content, Professional Planner Online represents

If you haven’t visited the website before, come and have a

a step forward in how Professional Planner will keep you up

look. If you have visited the site before, come and have a

to date with key industry developments and events. And it’s

look at the new one. We think you’ll like the changes.

simpler than ever before to get involved, to comment on the
articles you read, and to respond to the opinions and views
of your colleagues and peers.
Professional Planner Online will continue to provide you
with contributions from some of the industry’s leading
thinkers, technical experts and investment management

O N L I N E
www.professionalplanner.com.au

P R ACTI T I O NER P ERSP ECT I VE

11

From little things, big things grow
Alan Cockram finds that even a small gesture can take you down a path to the extraordinary, and correct the
work/life balance

F

or years I worked as a sole trader,
operating my own business as a financial
planner. I put in long hours and built a solid
client base; and although I enjoyed the challenge
and autonomy of working for myself, it was allconsuming.
By the time I reached my 50s, my children
were young adults and my involvement with the
church and Rotary club kept me busy, but not
enough to distract me from the office.
In 1995 my wife Judi and I decided to sponsor a child. We chose to send our money to a
seven-year-old girl living in Chennai, southern
India. Her name is Asha.
There is nothing extraordinary about helping
out an individual in need, but our decision to
visit her sparked a rather remarkable journey.
We first met Asha when she and 60 other
children appeared at the orphanage where we
were staying, to sing us several welcome songs
they had been rehearsing. I must admit, I wasn’t
able to distinguish her face in the crowd at the
time, but when she stepped forward I remember
thinking how fragile she seemed, and so shy.
She immediately captured our hearts, as did
the other children who were so eager to meet
us and enjoy our company. These children from
impoverished circumstances - some without parents, others simply unwanted, and many whose
families couldn’t afford to keep them - were not
poor in showing their love and appreciation.
On our return to Western Australia, Judi
and I resolved to find a way to help other
children in need in India, but not just through
sponsorship.
We eventually joined with two other Christians through the Indian Village Care Ministry
(IVCM) in Chennai - Don Williams, who used
to be a builder in Broome, and David Turkin,
who is a computer wiz and entrepreneur. By

Alan Cockram and children at an orphanage in Andhra Pradesh

adding my skills as a financial planner, we had all
the necessary components to start making a real
difference.
Our first venture working together was an
orphanage we now call Eagle Base in Andhra
Pradesh, also in southern India. We built it in
2006 and it now houses 30 children, with provision for the care of 13 elderly people.
The children, most of whom are sponsored
by generous Australians, receive three meals
a day, tuition and medical care, provided by a
doctor on site, who we employ to look after the
children’s health needs and to service the wider
rural community.
Since the construction of Eagle Base, we
have leased a building for an orphanage in Chennai and built a third orphanage in Kadambur,
which accommodates 58 boys. We have a fourth
orphanage in the pipeline, due to be built sometime this year.
I see my contribution as an extension of what

I do as a financial planner. I specialise in planning for retirement, investment, superannuation,
wealth creation and general financial planning.
What I do in India is plan for the future of these
children, who will hopefully benefit and someday
be self-sufficient and be able to contribute back
to their community as skilled, educated adults.
We provide the leaders of the homes with financial advice, help them maintain a budget and
step in to resolve money issues when necessary.
We publish newsletters and actively encourage
other Australians to participate in our projects.
Each year I make several trips to India,
sometimes taking a small group of visitors, some
of whom are sponsors of children. We stay at
the orphanages and spend time with the kids,
teaching them English and computing skills. It’s
always an enjoyable experience.
My involvement with the orphanages has
grown over the years, and increased to a point
where I had to make a crucial decision about

12

P R A CTI T IO NER PERS PECTIVE

my work here; and so I eventually
stopped operating as a sole practitioner and joined AMP financial
planning firm KeyPath in Osborne
Park in Perth.
I negotiated a four-day working
week and took the fifth day for my
charity work. My employer is very
supportive of what I do.
I don’t believe it’s just financial planners who can help those
in need, but my background has
provided me with the ability to see
large, challenging projects through
to their completion. I take solace in
the fact that the work we do in India is sustainable for the long term.
I think anyone who has
something to give can benefit from
donating their time or money to a
cause of their interest. I will often
advise clients that philanthropy is
an important part of estate plan-

Judi Cockram and friends

ning, as there are many benefits to
be had.
And you never know where one
small gift might lead.
In March this year, I was invited
to attend Asha’s wedding. She had
done as I had asked and finished
school before finding a husband.

The incentive for doing this was my
promise to contribute towards the
ceremony and to purchase a colour
TV for the newly married couple.
She is now expecting her first
child, and so I will be a grandfather
again.

Alan Cockram is an AMP financial
planner at KeyPath Financial
Planners in Osborne Park, Western
Australia. More information about
the work carried out by Alan and
his family can be found at
www.ivcm.org.au

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23/10/07 1:12:53 PM

LE G I SLAT I ON

13

In, out … shake it all about
The Government’s controversial “opt-in” proposals are likely to be a major hurdle, for more reasons than one.
Simon Hoyle reports

O

f all the proposals contained in the
Government’s Future of Financial
Advice (FoFA) proposals, few have attracted
more widespread opposition than the so-called
“annual opt-in”.
Along with banning commissions and the
introduction of an explicit fiduciary duty for
planners, the opt-in proposal was one of three
key recommendations in the package of reforms
released by the former Minister for Financial
Services, Superannuation and Corporate Law,
Chris Bowen. (It remains to be seen if his successor, Bill Shorten, will pursue the reforms with
the same enthusiasm.)
The FoFA package unveiled an “adviser
charging regime, which retains a range of flexible
options for which consumers can pay for advice
and includes a requirement for retail clients to
agree to the fees and to annually renew (by opting in to) an adviser’s continued services”.
The Financial Planning Association of Australia (FPA) has publicly and vocally denounced
the opt-in proposals as being unnecessary in a
regime where fees must be agreed to by the client, and paid directly by the client to the planner,
thus enabling the client to opt-out of an advice
relationship at any stage.
But research by Tepana Associates has
found that “advisers are united in the belief that
the regulator and the major industry body have
failed to understand the nature of the clientadviser relationship, the success of the current
disclosure regime, and the level of comfort that
many investors have with commission arrangements in the wake of reforms introduced nearly
10 years ago”.
“While regulation is intended to provide
better consumer outcomes, advisers believe it
will reduce the time they spend with their clients
and increase their administrative and compliance

‘The FPA has
publicly and vocally
denounced the
opt-in proposals as
being unnecessary’
workload,” says Kathleen Tepana, a consultant
for research group Tepana Associates.
“A significant number are yet to make plans
and are looking to their licensees for assistance in
transitioning to fee-for-service arrangements.”
But opposition to the opt-in proposal runs
deeper than just the effect it may have on the
client/planner relationship.
“Opt-in is considered a major business
disruption, and while it is recognised as a high
priority issue for planning businesses, it is one
that the majority have yet to address,” Tepana
says.
The research also finds that the opt-in proposals are thought likely to affect business values;
and if they’re introduced in their proposed form,
may accelerate the exit plans of a proportion of
advisers.
“The larger licensees stand to benefit,”
Tepana says.
“A number of respondents raise concerns
over the impact of future business values, with
a number indicating an intent to bring forward
succession or exit arrangements, while others
fear an increasing consolidation of advice businesses. It appears the proposed reforms will most
benefit the large institutionally owned licensees

who have large administration and compliance
back office support.”
Other beneficiaries may be platforms,
Tepana says.
“Opt-in is likely to drive a migration of
clients from legacy products into more modern wrap-based structures that support fee for
service,” she says.
“However, this will not result in the client
paying lower overall fees, but wrap and master
trust providers [will increase their margins],
further consolidating the nature of relationships
between product manufacturer and the advice
process.”
Overall, Tepana says, there is “a high level of
uncertainty over consumer benefits”.
“Planners believe that the proposed reforms
will not deliver any real benefits to consumers
but will transfer business value away from the
smaller independent practice, to the larger licensees, and the wrap and master trust sector.”
For more details of the Tepana Associates
research, go to the Professional Planner website:
www.professionalplannercom.au

14

C O VER S TO RY

C O VER S T ORY

W

hen the chief executive of the Investment
and Financial Services
Association (IFSA),
John Brogden, announced that the association
was both changing its name - to the Financial
Services Council (FSC) - and radically broadening its policy agenda, it sent a ripple through the
financial planning community.
Members of the FSC own dealer groups
- the FSC calls these groups financial advice
networks, or FANs - that employ 80 per cent of
all financial planners operating in Australia.
It didn’t take too much reflection to realise
that if the FSC plans to influence policy on
a much wider front, and if the interests of its
members and of individual financial planners
are not always in perfect alignment, some sort of
conflict is bound to arise, sooner or later.
How the FSC, the Financial Planning Association of Australia (FPA) and the Association of Financial Advisers (AFA) all co-operate
and compete to influence the development and
implementation of legislation will be critical.
Each organisation has its own perspective on
the financial planning industry, viewed through
its own prism; and each has its own ideas on
how the final rules and regulations should look
and work.
The final form of the legislation is likely to
be shaped over the coming 12 months, and it
will undoubtedly be influenced by contributions
from the key industry bodies.
“There’s no doubt that the next two to three
years will be dominated by working in the
trenches on FoFA [Future of Financial Advice]
and Cooper,” Brogden says.
“The broad policy announcements by the
Government have been outlined, but the level of
detail is very [limited], and we’ve already estab-

lished, between those two reports, 10 working
groups which have some 200 people from across
our membership working on our responses.
“It will take at least the next year before that
sees the light of day, in terms of legislation. We’ve
been told by Treasury that we’re not likely to see
legislation on FoFA until the second half of next
year. That’s 12 months from now - and that’s a
massive undertaking.
“The challenge that we’re finding is that this
isn’t an area of expertise for Treasury. I’m not
criticising Treasury, but this level of detail in
policymaking hasn’t been required of Treasury
before.
“In the next two to three years, it’s all about
being in the trenches with Treasury on the policy
detail.
“We will be very involved in setting the
agenda on FoFA and Cooper.”
The FSC is the 600-pound gorilla in this picture, and it obviously plans to use its size and its
influence to get the best result for its members.
“Our members directly or indirectly control
over 80 per cent of the financial planning industry in Australia,” Brogden says.
“We’ve got Professional Investment Services,
Count and DKN in our membership. We have
for the past five years been involved in the adviser
space.
“But we have no agenda and we have no
desire to supplant the role that the FPA plays as
a professional accreditation body for planners.
They do a great job.”
Brogden acknowledges that from time to
time the imperatives of FSC members, as fund
managers and product manufacturers, may conflict with the personal professional requirements
placed on the planners that its members control.
“My gut feel is that the only way it will shake
out is if [our interests] are aligned,” Brogden says.

15

“Our members will not allow discrepancies
with their individual advisers in an area like professional standards. That’s not meant to sound
like one will rule over the other; there will be
agreement. There has to be agreement.
“We’ve already shown that at an FSC/FPA
level by having joint standards.
“We have joint standards so there are a
handful of standards that apply to both FSC and
FPA members.
“We’ve worked together on the policy agenda
before. We obviously have significantly larger
policy resources than the FPA and the AFA
combined, but it’s my intention to work together
on issues.
“It’s about highlighting the similarities, not
exposing the differences.”
With more than 12,000 members, the
FPA is the largest body representing financial
planners. It’s the FPA’s members who are at the
forefront of unprecedented change, as financial
planning seeks to leave behind the ghosts of the
past and forge a new direction as a respected and
trusted profession.
But the FPA itself is not immune from
change, and it’s not immune from criticism for
how it has striven to shape the debate, influence
changes and establish itself as a professional
association.
The FPA is morphing from a body that protected and promoted the commercial interests of
its members to one that sets and polices the professional standards by which its members must
conduct themselves. It’s a pivotal development
in the industry - but not one that is necessarily
understood by all its members.
Commercial interests and professional
standards are often uneasy bedfellows (as an
accountant or an actuary); it’s this friction that
has led to a segment of the FPA’s membership

16

C O VER STO RY

becoming disenchanted. To a significant extent,
those members have migrated to the AFA.
The chief executive of the AFA, Richard
Klipin, says the AFA’s aim is to “inform and
educate, not just the industry but [to] go beyond
that, go to the regulator, go to government and,
increasingly, we see our mandate heading into
the world of consumer, which is where the future
lies for an association, clearly”.
“The world of association is rich and diverse,
and it’s often been said there should just be one
association that represents the entire industry,”
Klipin says.
“I think whenever there’s a monopoly you
end up a bit like Telstra has ended up - a bit in
no-man’s land. You represent everybody and
ultimately you represent nobody.
“Clearly, at the margins, there are common
interests, because there are common members.
Within the AFA, half of our board are CFPs.
Within the membership it’s probably not 50 per
cent - it’s reasonably lower than that. I would
have thought 20 to 30 per cent…would be common, I would think, between the associations.
That’s my gut feel.
“We have more in common than we have
as differences. I think that unity piece becomes
really important. I think it plays nicely when
there’s friction - friction is a good story, generally.
Over the last couple of years the differences in
particular with the AFA and the FPA have been
played up, and now there’s alleged merger talks,
and so on.
“But I think the pieces in common are far
more powerful than the pieces that are different.”
Klipin says the FSC is the “big uncle or aunt
in the piece”.
He says that under former IFSA chief executive Richard Gilbert and former deputy chief
executive John O’Shannassy, the AFA and IFSA
were “very closely aligned”.
“There’s been a very clear changing in leadership of the FSC and, in a sense, a repositioning
of their offer and their business,” Klipin says.
“I think a) it’s smart, and I think b) it’s good,
because I think where we as an industry, whether
we’re on the manufacturing side or the advice

Mark Rantall

side, where we’ve failed collectively is [in] communicating and articulating the simple proposition on what we do for the community.
“Is there overlap? Do we have common
membership? Absolutely. Most of our major
partners are members of the FSC; many of
our licensee partners are members of the FSC
FAN network; the question at the margins is
the mandate that the FSC seeks to drive for its
adviser- or FAN-driven members. At this point
I can only see us continuing to work together
constructively because we’re basically all after the
same end - which is, get more people in the community with advice and with the products and
services that those people bring to market.
“That’s our common aim. Where the associations rub up against each other, where friction
gets created, really is about some of the policy
items or policy agendas; perhaps some of the
services, and perhaps some of the positioning
that lends itself to grandstanding.
“But I think, in the main, it’s about the unity
and commonality of the message, rather than
playing up the differences.”
Klipin says the FoFA changes are a case
study of how industry bodies can work together,
but also how the differences between them can
be exposed.
“There is the big FoFA project running

within the three associations at the moment and
there is strong co-operation between the FPA,
the AFA and the FSC on all of the FoFA working groups,” he says.
“And whilst we might all end up in slightly
different outcomes, the process has got a lot of
commonality and a lot of working together built
into it.
“The AFA, because it’s the ‘by adviser, for adviser’ piece, what we’ve tried to bring to the table
is the common sense, real-world, what’s-actuallyhappening-in-adviser-practices perspective to
our policy stuff.
“Sometimes that’s not popular - the whole
commission debate is a good example of that.
Sometimes it’s against conventional thinking
and sometimes it’s not popular for some of the
thought leaders in our industry; but we’ve been
true to what the members are thinking and feeling and what they report is coming out of their
relationship with their clients.”
But FoFA and earlier changes, like the move
by the FPA and FSC to ban commissions on
investment and superannuation products, have
also shown that not all financial planners think
all representative bodies are created equal, nor
doing an equally good job. But Klipin says a drift
of members to the AFA is less about what the
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18

C O VER STO RY

“what it is the AFA delivers that its members
like”.
“We’re a voice by and for the adviser,” Klipin
says.
“That, in a sense, is a catchcry of what the
AFA’s strength is. Its strength since its inception
is that it’s very clear about who it represents, and
it represents the voice of adviser to the industry,
to the Government and the regulator, to the
media and to the consumer.
“Over the last three years, that voice has been
critical, because the industry has been under intense scrutiny, advisers and their reputations and
their ethical standing has been seriously called
into question by some segments of the community, and advisers feel they need a representative
body that’s going to stand up proudly on their
behalf and articulate the value that they deliver
into the community and into their client bases.”
Klipin refuses to criticise the FPA directly
for failing to represent planners’ interests.
“I’m only articulating what members of the
AFA say to me about why they joined the AFA
and why they stay members of the AFA,” he says.
“What other associations do, Mark will have
different sleep-at-night factors; John will have
different sleep-at-night factors.
“But it all goes to the heart of relevance and
value and being clear about why you’re there.”
Deen Sanders, the FPA’s deputy chief executive and head of professionalism, says the FPA’s
structure and objectives accord with the generally
accepted definition of a “professional association”.
“The [UK] Financial Services Authority’s
retail distribution review clearly identified what
it thought were the core requirements of a recognised professional body,” Sanders says.
“Those requirements are exactly the same
requirements that have been picked up in almost
every other piece of legislation for professional
recognition, around the planet. So they’re not
unique or surprising.
“We’re the only group in this entire marketplace that comes close to satisfying them. It’s
not something you can award to yourself. You’ve
often heard me say in the past that ‘professional’
is not something you can tag yourself with; it’s

‘It all goes to the
heart of relevance
and value and being
clear about why
you’re there’
something the community affords you with. In
the same way, a professional association can’t
automatically call itself a profession unless it has
satisfied the objective measures and assessments
around that. That’ a vital part of the puzzle that
is often overlooked.”
Mark Rantall, the FPA’s chief executive, says
the AFA is more of “an industry association”.
“It’s not unusual for somebody to be a member of more than one association; I’m a CPA and
a CFP - I’m a member of two associations - and
that’s not a threatening concept in its own right.
“It’s just, where are you going to get your
professional designation from, and your professional obligation from? And as we sit here today,
it’s the FPA.”
Sanders adds: “If I were to be slightly kinder
to the AFA, you might stretch it and say it’s an
association of professionals, as opposed to a
professional association.
“Those individuals are often members of
the FPA. They gather under that banner, but it’s
not a professional association. It’s a group that
gets together, and their professional obligation,
frankly, is to us, only because there’s no prosecution structure.”
Sanders acknowledges that there are things
the AFA does very well - most notably, giving
a forum to those who believe their voice is not
being heard.
“What the AFA are absolutely about, and
do well, is they capture that sense of professional
community, in terms of shared ideas and shared
dialogue,” Sanders says.

“We recognise the AFA have constructed
their environment very well around that particular piece: come and have a conversation with us,
we’re with you. That’s part of the community. We
have a similar relationship with our members,
but we’re not saying come and have a conversation with us, we’re with you; we’re saying come
and have a conversation with your professional
colleagues and grow - and be challenged by that;
be challenged by each other; be challenged by the
ideas of the community outside the FPA.
“We’re not hiding in a cave, where you can
all agree and have a fabulous time agreeing; we’re
out in the open air, dialoguing with the community, with government, with media, with the
external pressure points on the profession, with
the global pressure points on the profession, with
the concepts of ethics and professional standards.
“All those factors at play do create a sense of
some discomfort. And we absolutely acknowledge that the ‘professionalisation’ process can be
discomfiting, for people who absolutely do not
want to change.
“The mistake we’ve made is that this market
evolves fast, and the profession has evolved very
fast, and arguably faster than we’ve been able to
bring all our members along with us at a rate
they’re comfortable with.”
Rantall says the FPA welcomes a move by
the FSC to focus on the financial advisory element of its membership. In particular, the FPA
supports any moves to improve the quality and
integrity of products manufactured by FSC
members. Rantall says that while planners have
copped plenty of flack over investor losses, some
blame must be borne by the manufacturers of
“faulty” products, and the FSC is addressing that.
“We would absolutely support a raising of
standards and quality in the product manufacturing world. If the ‘tick of quality’ serves that
purpose, and there’s substance behind it, why
wouldn’t we as an industry, let alone a profession,
support it?”
Rantall says the FPA works closely with the
FSC “and we collaborate, and I think that’s an
important thing, particularly around the volume
of inquiries that are going on”.

C O VER S T ORY

“Where a conflict might arise, we’re very
clear about our professional standards, and
principle number one out of our code of ethics
- which is putting your client’s interest ahead of
your own, which also lines up with the fiduciary
duty - clearly is designed to deal with any conflict
that the financial planner might find themselves
placed in the way of.
“Regardless of what happens, the client’s
interests have to come first.”
If quality of product can be addressed by the
FSC, and if the quality and professionalism of
advisers can be addressed by the organisations
that represent individual planners, then it will be
a good result for all parties, Sanders says.
“IFSA beforehand, and FSC [now]…are
bringing to that space some sense of quality and
standards,” he says.
“In the absence of that there would be some
real concerns in the marketplace, just as in the
absence of the FPA you’d be a brave soul to be
stepping into a financial planning engagement.
“We need to be mindful that as organisa-

tions we’ve both evolved with a recognition that
ultimately, consumers need the best outcomes.
Their way of achieving that is through improved
product, improved efficiency at licensee levels that’s absolutely a way; that’s not a professional
way. The profession’s way is through client engagement, through professional advice. The two
almost mirror [each other, but] at some point,
there is possibly a conflict, where the efficiency
and price issues or licensee structural issues
impact on the obligation to the client.
“At that point we entrust our professional
members to be subject to their obligations as
fiduciaries.
“And frankly, I’ve got to say, we have overwhelming noise from them that they do that,
and do that regularly. All our research shows us
that whilst they have been confronted with conflict, they have resolved and responded to that
conflict, not always in favour of their employers
or licensees.”
Sanders says consumer protection is “best
served through a quality profession, and quality

19

products”.
“That’s where the FSC stuff comes in.
“Financial planners and clients should be
able in legal terms to have good-faith reliance
on the products that they are dealing with; that
someone else up the chain did their job properly.
We think that’s what they bring to it - that’s what
the tick is all about.
“But let’s not be confused about where they
begin and stop. They begin at the issue of FSC
membership, and they stop at the issue of FSC
products, or members’ products. They cannot
quality-tick advice, or quality-tick professional
practice, or quality-tick professionals, because
they’re not part of that framework. They do
reach into those spaces, and want to influence
that practice, but they do that from the issue of
licensees - quite rightly - wanting to protect their
risk and do other things.
“There will always be a difference between
how a licensee sees the world, and how a professional planner sees the world.”

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BDMs winning new-found respect
Once derided as ‘beer-drinking machines’, or ‘brochure delivery men’, since the GFC the role of the business
development manager has changed: life has got tougher, but also more rewarding. Nicholas Way reports

M

ichael Angwin, head of distribution for the research house van Eyk,
knows better than most how the world has
changed for business development managers
(BDMs) post the global financial crisis (GFC).
It’s a much tougher investment environment, but,
at the same time, a more rewarding one; in volatile markets, good advice is like nuggets of gold.
“Between 2003 and 2007, rising markets
made investing easy,” Angwin says. “Financial
advisers (and their clients) could rely on beta in
almost any asset class. Today, these planners have
to generate alpha for their clients, often in asset
classes where they don’t have much knowledge.
“In some regards, today’s investment climate
is like 2001-02; they were difficult years for
planners after the tech wreck and when retail
property was going through the roof; but good
planners with the right advice were able to establish their clients in good products for the boom
that followed from 2003 to 2007.”
For Angwin, who joined van Eyk five years
ago as a BDM, it means much more is required
of people in this position post the GFC.
“It has gone far beyond selling product. In
today’s market you have to know everything
about the products you are selling, and how they
sit in a financial planner’s strategic allocation.
“By this I just don’t mean their strategic
allocation as it applies to your products; I mean
how it applies to all the products across their
various portfolios. This means you have to have
an intimate knowledge of the planner’s business,
and this requires time and effort to build this
relationship.
“At van Eyk, this task is made easier by the
fact our BDMs come armed with the intellectual
capital that our research provides. It means we
can give planners holistic advice that looks past

Michael Angwin

today’s market noise and gives a three- to fiveyear macro picture of portfolio management. It’s
much more than just being about the merits of
an individual product.”
Gabriel Carey, a BDM at the boutique fund
manager Instreet, concurs with Angwin’s view
about the importance of understanding the
financial planner’s business. “Product knowledge
goes way past the product you are selling to
understanding where it fits in with the broader
investment strategy of an individual practice. Just
as important is to know when it doesn’t fit the
practice’s investment strategy and being prepared

to say so, even at the cost of a sale.“
In Carey’s opinion, there are four ingredients
to being a good BDM: a broad macro view of the
economy; a solid understanding of the financial
services industry; intimate knowledge of your
products; and understanding your competitors’
products.
“Financial planners will quickly find you out
if you don’t have the product knowledge, and
they’ll quickly stop dealing with you if you can’t
respond to their questions,” Carey says. “Today,
planners are time-poor and don’t have time for
BDMs who don’t have a sound knowledge of
their products, how it would dovetail into the
planner’s business, and the broader economy.
Remember, too, that these financial planning
practices are now under a significant compliance
regime, and this limits the time they have for
BDMs.”
From a financial planner’s perspective, when
a BDM knocks on their door, what do they
expect, apart from the obvious - another product
coming across their desk? As Angwin and Carey
rightly observe, they are time-poor and they
don’t want to waste time listening to a BDM
extolling the virtues of the latest product devised
in the fund manager’s back room - unless there is
a better story to accompany the product pitch.
Richard McLean, an adviser for the Melbourne-based practice Values Inspired Planning,
has seen hundreds of BDMs come through his
doors over the years. He says to get the best out
of a BDM, it is important for the planner to
state what his business is and at what stage of
development it is.
“To get the most out of them, first tell them
about your business, so they completely understand how you operate. Then they can voice
their opinion on what you are doing and perhaps

22

B U S I NE SS DEVEL O PMENT

how it can be done better. They may be aware
of things that we are not aware of, because they
are out there in the market more than we are,”
McLean says.
That approach resonates with Carey, who
believes BDMs should capitalise on their market
knowledge to advise individual clients.
“We’re in the market every day talking to
different advisers, and that gives you the opportunity to get to understand the best elements of
those businesses,” he says.
“Then, when you are talking with a specific
client facing a specific issue, you can draw on
this bank of knowledge to help solve this client’s
issue.
“It’s all about having a genuine interest in the
adviser’s business, having a thorough understanding of their operations and what business
goals they have set themselves. Then you will
appreciate what sort of issues they are facing and
hopefully draw from a kitbag of solutions you’ve
developed and present some of them to assist
them.”
How an astute BDM can help a financial planning firm is graphically illustrated by
McLean. He cites the example of a BDM from
Macquarie Bank who was in tune with his business challenges and was able to form a lasting
impression because he understood the business.
“It was the guy who looked after our CMT.
He saw what we were trying to do with selfmanaged superannuation funds (SMSFs). He
said, ‘you guys need to get on a plane and go to
Sydney and talk to Richard Barber from Class’,
a software provider that would help us with our
back office regarding SMSFs. It was one of the
best decisions we ever made, and it was because
he understood our business. He could tell that
we weren’t buying into whatever product he
was talking about, and it took a while for that
to come out, but in the end he realised we were
more preoccupied with the challenges facing our
business.”
McLean says a good BDM has to approach
advisers and planners not with just product, but
with expertise as well.
“If they can come and ask me what my big-

‘A good BDM
has to approach
advisers not with
just product, but
with expertise’
gest challenges in my business are right now and
say, ‘hey, do you mind if I come back to you on
those’, and go away and do some brainstorming
on it, I’d be more interested to listen to them
about their products,” he says.
“Good BDMs should be able to help with
problem solving, just like the guy from Macquarie.
“In this way, they form bridges where they
can help the business go to a new level by providing ideas and thoughts they have learnt from
their industry experience. They may be aware of
other strategies and markets that are very successful and perhaps pass that on to you. I don’t
think they go about telling you what other advisers are doing, but they can give you a heads-up
on what’s successful out there.”
Gaining the trust of the planner or adviser is
the key to a successful relationship for a BDM,
as McLean attests: “BDMs should be open to the
way an individual business is run and respond
thoughtfully to that,” he says.
“Completely understanding our business
is important. Most BDMs find it hard to get
to that stage where they can win the adviser’s
confidence to the point where they open up and
share how their business is going with them. If
they can reach this stage, then it’s possible both
parties can add value to the relationship.”
McLean says it takes a special individual to
gain that confidence from advisers and wonders
why more isn’t done by fund managers to provide BDMs with the requisite “tools” for the job.
“If they are just bringing in brochures, we

don’t want to know about it. But if they can see
how they can solve a problem, or provide a solution to a challenge we’ve got, that’s what we want
to hear about. We don’t want to hear a product
flog. We know they are there to sell product
- they get pushed by their bosses to produce
results - but if they’ve done their homework as a
company they should be coming up with products that are attractive anyway.
“To resonate with us, the fund managers
should provide the products best tailored for the
type of approach we take as financial planners.
They have to offer products that are appropriate
for our clients.”
For van Eyk’s Angwin, in today’s markets
those products need to be “active, not passive”.
“As a firm we’re a strong believer in active
management; we argue that investors will have to
take active positions to achieve outperformance,
as it is quite possible markets will be going sideways for some time. Even if they rise, it will come
with a lot of volatility,” he says.
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26

P LA NNER PRO F IL E

The writing on

the wall
John Hewison has seen plenty of change in his industry since 1985. He explains to Simon Hoyle why
the latest wave is merely the logical extension of a process that began almost two decades ago

J

ohn Hewison pauses to find a word to
describe the financial planning industry
he entered in 1985. Twenty-five years is
a long time, but it comes to him: “Cowboyish.”
“There was no need to have any formal financial planning-orientated qualifications,” he says.
“One applied to the regulator, which was
the NCSC [National Companies and Securities
Commission] then, for a securities representative’s licence - so everyone was licensed individually - and I got that without any trouble, which
surprised, me, and away you went.
“It was pretty wild and woolly, insurancedominated, dominated by ex-insurance people.
Massive commissions, not much product. There
were two rollover products: BT and Wardley. It
was learning on the job.”
Not being from an insurance background
himself - he was a corporate consultant immediately before he set up as a full-time planner Hewison viewed the industry slightly differently

from many of his peers.
“The thing that struck me when I first came
out of corporate life was I could not understand
why we were taking all the risks establishing
the marketplace and the relationship, and then
handing our client list over to a dealer group and
a fund manager. It didn’t make any sense to me,”
he says.
So right off the bat he resolved to do things
differently, and establish a direct and inviolate
relationship with his clients.
“So one of the advantages of having everything addressed, care of our offices, was that
there was no dealer group and there was no fund
manager owning our clients’ contact details,” he
says.
After a few hiccups in the early years - including discovering that a business partner had
stolen more than a million dollars from clients
- Hewison set up his own business, with his
own licence, in 1993. The company employed

three people. Today it has 11 staff supporting six
planners.
Changing environment

Hewison professes bemusement at some of
the anxiety being expressed about the changes
sweeping the industry. And he’s unsure why the
Financial Planning Association (FPA) seems to
cop the brunt of planner anger.
“Some of the stuff I’m reading about these
days I smile about, because if we go back to the
late 80s and into the 90s, when the FPA came
into being, there was no education,” he says.
“[The FPA have] driven the whole increase
in the education standards and developing education programs, and eventually then developing
other education institutions into delivering the
programs; they’ve driven professional standards;
they’re involved at an international level as a
leadership group driving international standards;
and I just think they’ve done an absolutely sensa-

P LANNER P R OF I L E

27

28

P LA NNER PRO F IL E

tional job.”
Hewison says the lack of entry qualifications
for the industry is a real issue that needs to be
addressed. He says, “if the general public really
understood the lack of standard required by
[RG146], they’d faint”.
“It’s just a disgrace,” he says. “And the FPA
is pushing that barrow with ASIC, trying to get
them to increase the standard.
“And I think the standard will naturally get
increased. When I did my accounting - when I
was a mere boy - you didn’t go to university, you
went and got a job and you did it part-time. It’s
exactly the same as the evolution of financial
planning; and now we’ve got a degree-based
entry point, we’re really going to be standing up
and [being] counted. And I believe that’s what
the general public expect; financial planning is a
complex and important professional service, and
people need to be properly educated.”
Hewison maintains that no one who has
worked in planning for any length of time can
reasonably claim to be surprised about what’s
happening today.
“I remember when the Diploma of Financial Planning was first introduced, in 1991 or
thereabouts, the writing was on the wall right
then and there, and anyone who didn’t see it was
just stupid,” he says.
“So I did that, I did my diploma; and then I
did whatever was required to do to get CFP in
those days. In 2000 I started my Master’s and
finished that in 2003. We’ve had a degree-based
policy here for 10 years - so I figured that if I
expected my colleagues to be appropriately qualified, I should be myself.
“I’m now doing a Graduate Diploma in tax.
“We don’t let a planner see a client, as a planner, until they have an appropriate degree plus
the CFP standard. They’re not a planner until
they get to that stage. We have a three- to fiveyear mentoring program. They work here under
the other planners, and work closely with them
while they’re learning.”
Since so much of the proposed changes are
not only inevitable but predictable, Hewison’s
business has been shaped to accommodate,
ahead of time, these forces of change.

What to make, then, of the resistance
to change in some quarters? Some planners
continue to argue for the status quo, claiming,
for example, that provided commissions are disclosed, then they’re OK - and in any case, clients
are happy to pay them.
Hewison disagrees.
“I think it’s a convenient argument. The
clients aren’t happy about it,” he says.
“You can survey existing clients all day long
and they’ll all say yes, that’s fine. But the majority
of people do not agree with commissions being
paid by product manufacturers, and I think
there’s a lack of understanding by consumers.
“I believe that if we’re going to call ourselves
professional advisers, and be seen as professional
advisers, then we need to stand up and have our
clients appreciate the value of what we’re providing, and pay us for it.”
Hewison, for his part, charges an asset-based
fee - a style of fee that is itself the subject of some
debate within the industry - for the ongoing
service his firm provides to clients.
“It’s fully stated, it’s deducted out of the
client’s account, they understand what they’re
paying, they understand what they’re paying for,

and they understand they’re paying us,” he says.
“The financial planner needs to be on the job
every day, all the time, continuously. So if there
are changes in a client’s circumstances, changes
in legislation, jobs that need to be done on their
accounts, the planner needs to have the ability to
do that.
“An ongoing fee - whether it’s a percentage of
assets or a flat fee, it doesn’t matter what it is. It’s
when the planner is paid by a product provider
that it just doesn’t hold up.”
Hewison says ongoing fees help to cement
the relationship between planner and client, and
that clients know only too well they can walk
away if the planner underperforms.
“We have a very close relationship and we’re
accountable - we don’t carry all of the responsibility; we make sure our clients understand it’s
a partnership - but we’re accountable to them,”
Hewison says.
“And if we don’t perform, they’ll sack us.”
Which brings the conversation to the issue
of the opt-in proposal. Hewison is not a fan, but
is resigned to the idea that it might come into
force anyway.
“It’s a nonsense from our point of view,” he
says.
“We have a contract with the client, an advisory agreement that they sign. They understand
what that’s all about. They understand they can
terminate us any time they like and they understand the payments they’re making to us, because
it’s coming out of their bank account. If they’ve
got an issue they can change the arrangement
and go somewhere else.
“It’d be inconvenient to us and to the client,
but if we had to have a contract renewal every
year, then we’d do it. We don’t want to do it, but
we’d do it.”
The proposed introduction of a fiduciary
duty for planners also “makes no difference to us
at all”, Hewison says.
What it means is that “everything you do has
to have the client’s interests first”, he says.
“There cannot be any conflict,” he says.
“Where we have conflict, we declare it. We’ve
had this debate about conflict. We’ve always
been of the view that we do not have conflicts.

P LANNER P R OF I L E

We do not accept payments or incentives or gifts
or things like that; we don’t use much managed
product, so we don’t get any benefits out of the
products that we recommend.
“But I suppose the conflicts arise where,
for example, we use a particular online broking
platform. It’s price-competitive and efficient,
but we’ve contracted with this [provider] to do
that. So, if you like, there’s some sort of conflict
that it’s convenient for us to use that, [but] there
could be a cheaper one.
“I don’t think fiduciary duty goes that far,
but we put it on our register just in case. It’s not
really a conflict. Clients would not see that as a
conflict. Everything we do is all about our client.
That’s our job - that’s the business.”
Strong relationships, ongoing advisory
service contracts, and being paid by the client
directly for services rendered are all “strengths of
the business”.
“Our long-term relationships with clients
- our extremely close relationships with our
clients, because we’re dealing with them on a
day-to-day basis - and the fact that we control
the revenue stream for our own business, make it
more valuable,” Hewison says.
Not that valuation is necessarily an issue,
given Hewison’s succession plan and the fact that
he has “no plans to retire at all”.
“I’m enjoying myself,” he says. “It’s good.”
“We’ve talked about appointing a CEO or a
general manager to replace me, but we’ve come to
the point of thinking that this business is pretty
simple. It does not have stock and debtors; it’s
a matter of the planners forming relationships
with clients and servicing them so that we retain
them.
“The whole emphasis is on long-term relationships. So the planners do the planning and
focus on the relationship, and then we have all of
the internal administration responsible for doing
all the day-to-day administration work.
“The business could in the future get complicated enough so it needs a general manager, but
right now we don’t believe it does. No need for it.
It’s just not a complicated business.
“All we do is look after the clients. Simple.”
Hewison is a fiercely independent opera-

tor, and he believes this structure helps the firm
avoid the worst of the potential conflicts of
interest that can arise for planners who work for
institutionally-owned dealer groups.
“In some ways it’s a shame that the professional advice industry in this country is institutionalised, and in itself there’s a conflict because
most of the institutions are product manufacturers in their own right, and there’s got to be a
difficulty in juggling what is completely unbiased
financial advice, and product manufacturers,”
Hewison says.

‘The writing was on
the wall right then
and there; anyone
who didn’t see it
was just stupid’
“That’s not meant to be a criticism of the institutional bodies, because I know a lot of them
are very dedicated to what they are doing, but I
think it’s a problem.
“The removal of conflicts is important - commissions and hidden payment arrangements
like volume incentives, platform fees and all this
stuff. It’s about time we stood up and accounted
for what we do. But there’s always been this
crossover of incentive payments for one reason
or another.”
Hewison says it’s not enough for planners to
rely on - or, more likely, hide behind - a veneer of
disclosure, and then to argue that this discharges
their obligation to manage conflicts. As has been
said many times before, Storm Financial was big
on disclosure. Disclosure didn’t protect clients
at all.
“We have clients come in here and say, ‘We
don’t pay any fees for what’s happening’, and we
say, ‘Well, someone’s paying’. And then we dig

29

into it and they say, ‘Oh that’s where [the costs]
are’ - and they realise they’re paying big amounts
of money they didn’t know they were paying,”
Hewison says.
Hewison is an advocate, a self-confessed
idealistic one, of a simple and straightforward
system of charging clients for what they get.
“If a fund manager charges the fee that they
need to make a profit, and the dealer group
charges their agents the margin they need to
make a profit, and the professional adviser
charges what they need to do to make a profit,
then everyone would be happy,” he says.
“Everyone would know what they are paying
to whom, for what.”
Hewison also believes the industry could
clean up its act on an educational front. And he’s
a big supporter of the FPA and its push to raise
standards.
“The next thing, in a perfect world, is to require everyone to be degree-based or equivalent,
with some sort of transitional arrangements for
people who have been in the industry for a long
time; and get really, really serious about becoming a profession and standing up and being
counted,” he says.
As the industry matures, “the FPA is going to
become more of a standards- and practitionerrelated organisation”, Hewison says. He says that
since day one, “their main game has been driving
professional standards and education standards”.
“There’s been principal and practitioner
membership, and that’s linked together harmoniously for most of the time, and not so harmoniously at other times. But probably now that the
standards have been driven to where they are
- and now of course the CFP has been de-linked
from principal membership, so you don’t have to
be a member of a principal member - there still
is a requirement for financial planning practices
to be involved. After all, they are administering
or supervising the standards of their advisers, so
there needs to be a linkage.
“The really important role now for the FPA
is to be a standards organisation, and that’s
where their concentration ought to be, and be
able to be seen by Government and consumer
groups as being that sort of organisation.”

30

C LI ENT CAS E S TUDY

C LI ENT C ASE S T U D Y

31

Meaty
strategy
Consolidating tax savings and diversifying their portfolio have put two
baby-boomers back on track to achieve ambitious retirement targets.
Mark Story explains how they did it

W

ith their faith in financial advice shattered
after a former planner
unexpectedly went bust,
it took a friend’s referral many years later for
Brisbane-based butchers, Madge (58) and Frank
Oliver (60) to again seek long overdue financial
guidance.
In May 2008, a few years before they were
ready to retire, the Olivers looked to financial adviser John Duncan for a wealth creation strategy
that would help their transition from full-time
work into a worry-free life of leisure.
Having concluded early in their careers

that financial planners weren’t to be trusted,
the Olivers spent the next 20-odd years cobbling together an eclectic basket of investments
based on the recommendations of friends and
acquaintances. And when they first approached
Duncan, at face value they appeared relatively
well set-up to be self-funded retirees within a
few short years.
Despite being self-confessed novices in the
investment stakes, the Olivers had successfully
managed to pay off the family home, held three
personal super funds, life insurance bonds,
whole-of-life policies and two rental properties.
They’d also amassed $390,000, split between

direct equities and term deposits. These were
held within a self-managed super fund (SMSF)
set up earlier by their accountant as an appropriate tax structure for these assets.
“Intuitively we knew we weren’t investing
as professionally as we could have been. So it
was uncertainty over retirement options and tax
strategies that prompted our long overdue call to
John Duncan for advice,” says Madge.
Rebalancing act

would be a costly one.
“Had Madge and Frank simply continued
what they were doing, it’s a safe bet they would
have never delivered on stated financial expectations,” says Duncan.
With a four-year window before Frank
planned to retire at age 64, Duncan was charged
with helping to deliver on key outcomes, including: After-tax income of $100,000, an additional
$130,000 to cover myriad travel expenses, new
car purchases, and significant renovations to a
family residence - plus $35,000 on call for unexpected expenses.
Duncan’s best estimates suggested that to deliver this outcome within four years, the Olivers
would need to amass around $2 million in assets.
“Given that they already had existing capital
of $1.65 million, they needed a sound strategy to
deliver the shortfall - of around $147,000 annually - over the stated time frame,” says Duncan.
“Given the expected returns of their existing
assets, this meant that they needed to tip in
$32,000 per annum.”
Investment consolidation

With much of the Olivers’ expected growth
wired to a super strategy, Duncan’s first recommendation was to redeem their existing Colonial
insurance bonds and contribute the proceeds to
the SMSF as undeducted contributions. This
had the net effect of reducing the annual tax
on earnings from 30 per cent to less than 15
per cent annually. It also enabled them both to
qualify for the Government’s superannuation
co-contribution.
“Given that the crediting rates were above
the 7 per cent annual earning rate required to
reach their goal, the Olivers’ ING whole-of-life
insurance policies were kept with the intention
of converting to endowment policies,” Duncan
says.
“And to avoid a double-dipping of fees, their
three personal super funds were then consolidated within the SMSF they’d set up for their direct
equities and cash.”
Asset class investing

Funds within the super fund were initially

‘Their current
- albeit ad hoc investment strategy
would be a costly
one’
held in cash before being invested within a
diversified portfolio using an “asset class investing”, or index investing, philosophy. According
to Duncan, asset class investing should provide
superior performance when compared to actively
managed funds by avoiding exposure to unrewarded risk, transaction fees and tax costs.
Having concluded that they no longer
wanted the daily pressure of managing their
financial affairs, Duncan also recommended that
the Olivers outsource the data management to
Macquarie Wrap.
“While the Olivers are paying a 0.67 per cent
fee for this service, a portion is rebated back as a
volume discount,” advises Duncan.
Investments were also moved from a direct
portfolio to a more diversified approach using the
same asset class investing principles. By employing the same diversification strategy, the Olivers’
eclectic basket of shares was also reviewed and
certain stocks that no longer matched their
investment profile were sold, with the proceeds
going into short-term cash.
International exposure

Given that their age still suited a healthy
appetite for risk, Duncan recommended that the
Olivers split their portfolio between 40 per cent
defensive stocks and 60 per cent growth stocks.
Part of the overdue rebalancing, adds Duncan,
meant providing much-needed international
exposure, which now comprises 12 per cent of
the total portfolio.
“By investing around $600 a week at an
estimated 7 per cent growth, the Olivers were on

An authorised representative of FYG Planning,
Duncan’s qualifications include a Diploma in
Financial Planning and a Bachelor of Business
majoring in banking, finance and accounting. A
financial adviser since the mid 1990s, Duncan
has been a CFP for more than 10 years and was
admitted to the prestigious Personal Investor
magazine “Masterclass”, which showcased the
Top 50 financial planners in Australia. Duncan
specialises in strategies for pre- and postretirement, wealth accumulation and wealth
protection. He co-founded Unity Partners in
2007 following almost a decade as a senior
financial planner with Wilson HTM.
Advice structure
The firm has gravitated towards a fee-forservice model. While commissions are still
paid on life and income protection insurance,
they’re typically dialled back to zero on all other
products.
“Our main aim is based on getting clients from A
to B with the least amount of risk, and providing
market returns after fees,” says Duncan. Clients
pay a fee commensurate with the volume and
complexity of advice being prepared. In the case
of the Olivers, this is currently $4000 annually.
History
Madge and Frank Oliver made initial contact
with Duncan in May 2008 following a referral
from a self-employed friend who’d been an
ongoing client of Unity Partners for some time.
While they’d been using a share broker to buy/
sell shares on their behalf, it was concerns over
how to prepare for pending retirement that led
the Olivers to seek guidance from a financial
adviser. While the Olivers were some years away
from retirement, they wanted to know what
their options were, and how they would be best
structured around the family butchery they’d
operated for more than 25 years.
Strategy
Having written financial planners off as useless,
due to a bad experience many years ago, the
Olivers needed to have their faith restored
before they could proceed on two key elements:
1) Guidance on how to successfully transfer
into retirement, and 2) the role that a diversified
super strategy - within the right tax structure would play in delivering that outcome.

target to achieve their financial goals without the
additional risk typically associated with a gearing
strategy,” Duncan says. “So the degree of risk that
the Olivers needed to take was ultimately qualified by the size of their financial gap.”
Transition to retirement

As Frank had recently turned 60, Duncan also recommended that he incorporate a
transition-to-retirement strategy into the bigger
picture.
“With Frank now at transition-to-retirement
age, I recommended that he salary-sacrifice a
large portion of his pay to super and then draw
back from super the required amount to fund
their lifestyle. Madge will adopt the same strategy when she too reaches age 60,” says Duncan.
By moving the other assets into Frank’s
SMSF - now in pension phase, since he’d turned
age 60 - Duncan says it was possible to deliver
an even better tax outcome. Consolidated tax
savings in the first year were around $18,000 and
Duncan expects similar savings in year two.
Even with the turmoil over the past few
years, Duncan says the Olivers’ net asset growth
is still tracking well against stated goals.
“I expect them to have $99,000 in annual

‘It also means
they won’t have
to sell any assets
to maintain their
income’
income - predominantly from super - when
they plan to retire in June 2012,” says Duncan.
“They’re now in a position where they can decide
to keep working because they want to, not because they need to.”
Integral to the Olivers’ overall transition-toretirement strategy are plans to sell the family
home, and move into their rental property at
Cleveland - following major renovations. Given
that they’ll receive small business tax relief on
the sale of their business premises, and avoid
capital gains tax (CGT) on both the sale of the
family home and future renovation work on the
Cleveland property, Duncan say this is a highly
tax-effective strategy.
Embedded value

As well as valuing his ability to convert
“financial speak” into everyday language that a
butcher and his wife could understand, the Olivers equally appreciated the time Duncan spent
ensuring they fully explored new ideas that were
initially foreign to them.
After further scrutiny of their planned
lifestyle during retirement, Madge says Duncan
showed them how they could live on a significantly smaller amount than originally envisaged.
“We can do what we like once we’re fully
retired, but it amazed me that we’re able to live
comfortably on a significantly smaller amount
during this transition-to-retirement phase,” says
Madge.
At the outset, she also admits to not fully
understanding the added benefits of a transitionto-retirement strategy - notably its ability to pre-

33

serve other money from being spent elsewhere.
“I’m now more aware of the need to get as
much money into super as we can. Had we not
been discouraged by a former adviser way back
when, we would have done all this years ago,”
says Madge. “John’s fees are always a bit of a
shock, but we’re significantly better off financially
for having brought more insight and structure to
the planning process.”
Easing pressure

While the Olivers have no immediate plans
to stop working, Duncan expects them to start
winding the business up within the next two
years. When they finally call it quits and shut up
shop, Duncan recommends the Olivers retain
two years’ income in cash as a buffer against any
future downturns.
“It also means they won’t have to sell any assets to maintain their income,” says Duncan.
With none of their three grown-up children
remotely interested in taking over the reins of
the meat business, he says a future exit strategy
will be less about goodwill and more a question
of maximising the sale of the business premises the proceeds of which will go into super.
“But the beauty of a transition-to-retirement
strategy is that it takes the pressure off selling the
business,” says Duncan. “It allows them to finally
take time off from the business without worrying
about lost income.”

We’ll help
you grow from
the middle up.
You may not recognise our name. But as a
leading provider of wholesale investment
solutions, we’re already at the centre of
more than 10,000 advisors and 400 dealer
groups, as well as some of Australia’s
largest ﬁ nancial institutions.
So why put us at the heart of your
operation? Mostly because we can
help you meet your clients’ increasing
demands. From equities trading to
gearing, portfolio administration and
beyond, we can help broaden your
oﬀering. And grow in this rapidly
changing market.
For more, call 1300 360 896
or visit coreservices.com.au

Disclaimer: Share trading through Core Equity Services is a service provided by Australian Investment Exchange Ltd (“AUSIEX”) ABN 71 076 515 930 AFSL 241400,
a Participant of the ASX Group. Core Equity Services is a trademark of the AUSIEX. AUSIEX is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth
Bank of Australia (“the Bank”) ABN 48 123 123 124 AFSL 234945. The Bank and its subsidiaries do not guarantee the obligations or performance of AUSIEX or the
products or services it offers. AUSIEX is not an Authorised Deposit Taking Institution and its obligations do not represent deposits or other liabilities of the Bank. This
information has been provided for Australian Financial Services Licence holders only. Please consider the appropriateness of the information provided in the PDS/
T&C’s in regard to your client’s individual needs and circumstances. Products under the Colonial Geared Investments brand are provided by the Bank. CSL0028/PPM/F/L

SP EC I AL RE PORT

35

Planners going for brokers
Lisa Pennell delves into the world of direct equity investing and reports on the latest trends and developments in
products and services

T

he global financial crisis
(GFC) wrecked more
than just portfolio values - it shook
consumer trust in the financial
services industry overall. When the
dust finally settled, many managed
fund investors were left scratching
their heads, asking why they had
trusted and paid for expert advice
from fund managers to end up losing out anyway.
As part of the ensuing fallout,
thereâ&#x20AC;&#x2122;s been a surge in the use of
retail online brokers. The number
of Australians trading online rose
by 50,000 over the past year to a
new high of 650,000 in May 2010,
according to the Investment Trends
First Half 2010 Online Broking Report. And thatâ&#x20AC;&#x2122;s just the beginning
- the growth in underlying trader
numbers should see future highvolume months set new records for
the online brokers.
Demand from their clients
is thought to be driving a similar
behavioural change in financial
planners, who are increasingly turning towards direct equity investments for new client funds. Since
2008, advisers have been gradually
moving towards direct shares and
other
including
C Slisted
L 0 0investments,
2 8 _ PPM
_ F_ S1
hybrids, exchange-traded funds

.

(ETFs), real estate investment
trusts (REITs), listed invested
companies (LICs) and separately
managed accounts (SMAs), but
this year in particular, thereâ&#x20AC;&#x2122;s been a
dramatically larger shift.
Managed funds have clearly
been the biggest losers - the June
2010 Planner Direct Equities (&
SMA) Report shows that just half
of recent inflows were directed to
unlisted managed funds, down
from 62 per cent the year before.
And the trend looks set to continue.
Investment Trends say two-thirds
of all planners now advise on direct
shares and this group expects their
allocation to direct equities to rise
from the current level of 23 per cent
of funds under management, to 34
per cent within the next three years.
The move away from managed
funds and towards direct listed
investments is prompting another
shift in the financial services
industry - leading planners to look
for alternative platforms. The
Investment Trends report shows
many planners are currently using
multiple channels for direct equity
transactions, with each planner
using on average 1.5 different channels.
p d fOf those,
P a g 64
e per
1 cent
1 4currently
/ 0 9 /
use an investment platform, 42 per

1 0 ,
4 : 4 9 PM
Arnie Selvarajah

The Core Trading platform.

36

S P EC I A L REP O RT

Pete Steel

cent use a full-service stockbroker
and 32 per cent use an online broker that’s not on a platform.
Interestingly, how trades will be
facilitated in the future is still not
clear, although it does seem likely
that most planners intend to trade
electronically. When the planners
were asked which channel they
would prefer to be using for direct
equity transactions in three years’
time, 45 per cent said an investment
platform, 20 per cent said an online
broker (not on a platform), 16 per
cent said a full-service broker, 7 per
cent said planning software and 6
per cent said they would prefer to
use a white label platform.
Among the investment platforms, BT Wrap, Macquarie Wrap
and Asgard eWrap are the most
widely used for share trading, and
these are also perceived to have the
best direct equities offering. On the
other
hand, there are no statistics
C S L 0 0 2 8 _ P P M_ F _ S 2
currently available on the wholesale

.

market share of the online brokers.
According to Investment
Trends, just over half of online
Australian retail investors use
CommSec as their main broker.
E*TRADE, owned by ANZ, has
17 per cent market share, Westpac
Online Investing holds 10 per cent
and NAB OnLine Trading is at 6
per cent. In what may yet shape up
to be the David and Goliath battle
of online broking, the biggest mover
over the past year was Bell Direct,
whose primary share doubled from
2 per cent to 4 per cent, driven by a
combination of low price and high
client satisfaction.
Despite the lack of accurate
market share data, anecdotal
evidence suggests Commsec’s
retail dominance is reflected in
the wholesale arena. The acquisition of IWL three years ago gave
CommSec significant market share
in
wholesale
broking, leading to the
pdf
Pa ge 2 1 4 / 0 9 /
launch of Core Equity Services in

March 2009.
After six years’ experience
with the Commonwealth Bank,
most recently as Commsec’s CIO,
Pete Steel was appointed general
manager of Core Equity Services
in November 2009. He says that
at the time, he saw an opportunity
to transform the wholesale online
broking services on offer. He also
believed no one was providing a
good end-to-end solution for advisers whose value proposition had
been challenged by the GFC.
“We set out to provide a good,
viable alternative to existing channels. The difference in the Core
Equity Services offering is that it’s
built for service, including the capability for data feeds, invoicing and a
whole range of tools,” Steel says.
“Most importantly, we have
great people, a dedicated adviser
desk and a world-class website with
1 robust
0 ,
4technology.
: 4 9 PWe
M are able to
provide guidance to planners on

‘The real
question is, is
the platform
the hub or is
the planning
software the
hub?’
exactly what to buy and sell via our
para-planner portfolio construction
service, which helps them look good
to their clients.
“We have the best research
in the market and are focused on
creating models that are more acceptable to advisers. The next step
will be integrating those models
to make them even easier to use as
well as bringing out new services to
improve the integration of information.”
Steel says while we’ve already
seen a big flow out of managed
funds, he will not be surprised if
between 60 and 65 per cent of
client inflows are directed to direct
listed investments within the next
18 months.
“ETFs are going to become
even more important for planners
as a cost-effective and easy way to
diversify their client portfolios,” he
says.

Increase your advice oﬀering…

SP EC I AL RE PORT

“The challenge as the financial
planning industry moves towards a
fee-for-service model is for planners
to figure out how to provide a good
value proposition and attach the
right fee structure.”
Online broker Bell Direct was
first launched in November 2007
and in May 2008, Arnie Selvarajah
was appointed CEO. Sporting a
resumé that includes executive
manager at CommSec and a role
at Bankers Trust, where he was
directly involved with the development and launch of BT Wrap, he
says the aim was to create a new
paradigm in online broking with a
strong client focus.
Selvarajah says the Bell Direct
website is easy to use and informative with several unique features,
including multi-client trading,
which allows a planner to place buy
or sell orders for multiple clients at
the same time.
“Although the orders are placed
separately with the ASX, they are
placed almost instantaneously. The
feature enables a planner to get a
number of clients in or out of a
particular stock with the press of
one button, relieving the pressure of
execution,” he says.
“The functionality of the site
makes it easy to find a client’s portfolio and instantly see any relevant
news and announcements relating
to that stock, giving the client the
confidence [that] their adviser is on
top of things.
C“In
S Lterms
0 0 2
_ PPM
_ Fmod_ S3
of 8research
and
elling, after my previous experience

‘Trading
outside a
wrap allows
the planner
to make
a variable
margin on
each trade’

.

will want their clients to be able
to view or access their portfolios
directly.
“Today, the whole model is
in question and it’s important for
planners to get a clean business
model to begin with,” he says.
“Some of the new features available
via online brokers could in fact create challenges for planners if they’re
not prepared for them.”
Selvarajah describes the move
towards direct equity investment
as a “quantum shift” and says that
on top of a general dissatisfaction
with managed fund performance
post-GFC, investors are tired of
seeing any positive returns whittled
away by fees.
in development of a wrap, I didn’t
He says planners are transitionwant to create a closed model.
ing from a commercial model based
Rather than dictating what the
on fees and trail commissions to a
planner can do or where they can
fee-for-service model, and direct
access research and portfolio modequities trading outside a wrap alelling, we are focused on building
lows the planner to make a variable
links and integration with other
margin on each trade.
sources of information.”
“There’s new consumer resentBell Direct also has the facility
ment towards high fees buried in
for client trading, either alongside
managed funds, and in fact any lack
the planner in one account or in
of transparency on commissions or
separate accounts, which can still be payments,” Selvarajah says. “With
consolidated for reporting pura flat fee of $20 per trade on our
poses.
service, the planner can decide a
“We’ve had a great response
specific mark-up for each client, or
to this feature. It’s a great way for
even each trade if they want to.
planners to demonstrate value and
“The reality is there’s an arms
allows for increased transparency,”
race going on at the moment in onSelvarajah says.
line broking. It’s all about technolSteel says that Core Equity
ogy; who will get it out first, who
Services expects to add a similar
will offer it cheaper.”
p
d
f
P
a
g
e
3
1
4
/
0
9
/
1
0 , Steel
4 :says
5 0Core
P Equity
M
functionality by the end of the year,
Services
but points out that not all planners
has a highly competitive rate card,

37

which calculates a fee based on the
bundle of services a planner is using, rather than a flat fee-per-trade
pricing structure. He adds that in
the current environment, as well as
wanting to manage costs, advisers
want good integration of information to facilitate performance and
tax reporting, leaving them less
dependent on wraps.
Selvarajah agrees, and says Bell
Direct is also working on data feeds
for all major planning software
options to reduce the workload for
planners in consolidating information.
Within the world of investment
platforms, listed investments are
also attracting attention. Macquarie’s head of insurance and platform,
Justin Delaney, says he’s seeing
increasing demand and increased
awareness from planners for direct
equities via the Macquarie Wrap.
Around 40 per cent of Macquarie
Wrap’s holdings are direct equities around double that of its competitors - with the platform currently
settling around 35,000 trades a
month.
Delaney points out that the liquidity of listed investments is also
driving their increased popularity
after many managed funds were
frozen post-GFC.
“Investors want to know they
can easily access their money, if
they want to, when they want to,”
he says.
Although Macquarie does operate a wholesale online broker arm
offering, Delaney says it would be

…to meet your clients’ increasing demands.

38

S P EC I A L REP O RT

“premature” to talk about specifically targeting the online segment at
this point. He believes a wrap platform is not in competition with an
online broker in any case, as he says
the value proposition is completely
different.
“The wrap offers a full custodial service and so it’s a strong
efficiency choice. The benefit of the
wrap comes with settlement and
planner access to overall information. We contain all the cost-based,
income and trading information in
one place, reconcile it and audit it,”
Delaney says.
“Even though interfacing can
work, with any sort of feed of information there’s always the chance of
missing pieces and at the end of the
day, someone still has to perform
the reconciliation.
“Our research shows a planner
can manage 120 clients within the
wrap compared to 70 without it,
which is a 70 per cent increase in
efficiency via the wrap. The wrap
enables the planner the time to
provide advice to their clients.
“It’s a case of horses for courses.
If a planner is able to get a client a
good deal with another option, go
for it. But it doesn’t take long for the
value of the wrap to become clear,
particularly with any sort of volume
or complexity - the administration
has got to be done somewhere.”
But Steve James, head of adviser
trading solutions at Core Equity
Services, says although the wrap
is “a bigger universe”, many clients
C S L 0 0 2 8 _ P P M_ F _ S 4
simply don’t want their shares held

in the name of the custodian.
“In today’s environment, a lot
of investors want to see their shares
held in their own name. And with
more and more clients pushing for
transparency, the wrap holding fee
can be a barrier too,” James says.

our sales reports show the hard
truth. The trend towards online
broking is definitely growing.”
The online brokers say one of
the big draw cards for planners
using their service is the lower cost,
but Delaney says the argument that

Justin Delaney

.

He says that with Core Equity
Services' data feed capability with
the major planning software,
including Visy Plan and XPlan,
the issue of consolidated reporting
within a wrap is less relevant.
“The real question is, is the
platform the hub [of an adviser’s
business model] or is the planning
software the hub?” he says.
pdf
Pa ge 4 1 4 / 0 9 /
“Whatever the research says,

wraps are more expensive is simply
not true.
“Planners can choose from 40
different brokers within the wrap to
facilitate a trade, so the cost of the
trade will be according to whichever
broker they choose, and it’s clear
and transparent. The other discrete
fees involved in the wrap are based
on each component in the chain,”
1 0 ,
4 : 5 0 PM
he says.

With the Core Trading Platform, you can easily trade Australian equities,
ETFs and options & warrants, from one convenient platform. It will not just help
you meet your clients’ growing demands, but help you grow your business, too.
For more, call 1300 360 896 or visit coretrading.com.au

Delaney says as the Macquarie
Wrap model is relatively advanced,
the only significant new feature
planned is the inclusion of model
portfolios, which he expects to be
available by the end of the year.
“Every adviser has their own
way to manage client portfolios. We
want to offer options for the adviser
while still allowing them to tailor
the macro to the individual client,”
he says.
Selvarajah suggests that rather
than planners making a channel
choice for direct equity investments
based on their own priorities, the
key challenge today is to understand what clients are looking for.
“It’s a new world and planners
need to deliver what their clients
want,” he says. “To do that, they
need to ask their clients what they
want; do they want to be advised?
Do they want to place trades themselves? Do they want to review their
own portfolio? Will they be using
an accountant anyway, meaning
reporting might be less important?
“In the past three years there’s
been more written about financial
services than ever before, including
the way advisers are renumerated
and how fees can be hidden.
“The client has changed in what
they want and what they know - the
average consumer is much better
equipped and hungry for value. As
an industry, we’re now dealing with
a knowledgeable and discerning
consumer.
“I’d dare anyone at this point to
ignore the client.”

How to manage
growth beyond
managed funds.
Whether driven by the rise of selfmanaged super, the increasing popularity
of ETFs or simply the demand for greater
transparency of advice, clients are
increasingly questioning the value of
managed funds.
With our Core Trading Platform (formerly
Virtual Broker), you can broaden your
oﬀering of advice and provide clients with
timely portfolio recommendations.
From one convenient platform, you can
easily trade Australian equities, options,
warrants and ETFs. Helping you not just
to meet the requirements of the changing
market but giving you an opportunity to
grow your own business, too.
For more, call 1300 360 896
or visit coretrading.com.au

Disclaimer: Share trading through Core Equity Services is a service provided by Australian Investment Exchange Ltd (“AUSIEX”) ABN 71 076 515 930 AFSL 241400,
a Participant of the ASX Group. Core Equity Services is a trademark of the AUSIEX. AUSIEX is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth
Bank of Australia (“the Bank”) ABN 48 123 123 124 AFSL 234945. The Bank and its subsidiaries do not guarantee the obligations or performance of AUSIEX or the
products or services it offers. AUSIEX is not an Authorised Deposit Taking Institution and its obligations do not represent deposits or other liabilities of the Bank. This
information has been provided for Australian Financial Services Licence holders only. Please consider the appropriateness of the information provided in the PDS/
T&C’s in regard to your client’s individual needs and circumstances. Products under the Colonial Geared Investments brand are provided by the Bank. CSL0028/PPM/F/R

40

RISK

What’s over the horizon for the
financial advice market?
The acceptance that commissions were going to be removed as a form of remuneration for providing
financial advice has sometimes been grudging. But Richard Weatherhead says the Ripoll report
recommendations were bipartisan and the industry has responded quickly

W

hen Chris Bowen published the
Future of Financial Advice (FoFA)
in April this year, the package of Government
reforms was not the initiator of change, but it
has certainly been the catalyst to formalise this
rapid evolution in the market.
Since the FoFA release, I have been fortunate
to talk to many dealer groups about the implications for their businesses and potential strategies for the next five to ten years. Developments
already under way in the market have taken on
a momentum of their own and Government
policy, whilst important with regard to detailed
implementation, is less likely to be the underlying driver of change - market forces have now
taken on that role.
In this article I discuss some of the themes
emerging from discussions with dealer groups
over the past few months. They are likely to be
prominent in the strategic thinking of advice
businesses in the future.

through shared back office, compliance, research
and other services are often sufficiently attractive
to make many integrations of this kind successful.
Some industry observers have seen the
seemingly inexorable growth of the institutionally-owned adviser groups and the dwindling
number of independents (in ownership terms)
as leading to too much concentration of market
power and as a threat to genuine choice in the
advice market. It would certainly be a poor
outcome for consumers if market concentration
led to advice becoming homogeneous and the
market lacking competition.
However, if dealer groups can make the
transition to institutional ownership whilst
maintaining their unique value proposition with
tailored advice and services for their clients, the
ultimate ownership of the dealer group is not
important.
Commissions and fees

Vertical integration

We have already seen a number of independent dealer groups merging into larger wealth
management groups - particularly the bankowned advice networks. This clearly provides a
strong financial foundation for those businesses,
particularly if volume-based platform rebates are
banned (see later on this point).
Obviously, in mergers of this kind, the cultural fit between the two organisations is vitally
important, as is the remuneration structure
established for the former business owners
going forward. However, the significant savings

The transition from commission to fees
for superannuation and investment products
is already well under way, with groups such as
AMP Financial Planning, NAB Financial Planning and AXA Financial Planning, to mention
but three, having now made the transition to a
fee-based remuneration structure.
A few, such as Godfrey Pembroke, are moving to a fee basis for life insurance too.
Two key issues going forward will be:
1. Whether asset-based advice fees continue
in their current form or whether market forces
(whether or not they result from regulatory

‘The use of SMAs...
is likely to increase,
particularly for
higher-net-worth
clients’
change) will drive a shift towards “flat fees” - in
other words, fees agreed with the client in dollar
terms (albeit subject to indexation), rather than
being based on a percentage of funds under
advice; and
2. The details of any advice opt-in arrangements that may be imposed upon the industry.
Irrespective of any regulatory changes, the
market seems likely to move increasingly to flatdollar fee structures over time. Indeed, a similar
move for risk insurance also seems inevitable,
albeit in the longer term - notwithstanding the
concerns expressed by some industry commentators that such a move could exacerbate the
under-insurance problem.
Some dealer groups appear to be relatively
relaxed about a move to flat-dollar fees, regular
opt-ins for advice and the removal of commissions in respect of risk insurance.
However, these tend to be in situations
where advisers have close ongoing relationships
with their clients, reinforcing the value they add

RISK

through ongoing strategic financial
and asset allocation advice, so that
their clients are likely to be fully
aware of the high levels of service
they are receiving in return for the
fees they are paying.
One outcome of the move to
flat fees is that more accountants
will move into providing financial
advice. The absence of conflicts
and the alignment of remuneration
with the client’s interests fits well
with their existing model.
Platform and fund
manager rebates

The legitimacy (or otherwise)
of platform rebates has perhaps
ignited as much passion in the
industry as advice opt-in arrangements and commission on risk
insurance.
Many industry participants
have argued that platform fees are
merely fees for a service - namely
the provision of a platform upon
which products such as investments, superannuation and risk insurance are administered. As such,
platform rebates would be service
fee rebates, unrelated to the provision of financial advice, and could
continue in their current form.
Others have countered that
if this were the case then clients
should have the ability to move
from one platform (or “service”) to
another at no cost. In practice this
becomes difficult.
For example, in relation to
superannuation, when moving from
one platform to another in a different superannuation trust, assets
must be sold within one trust and
repurchased within another, thus
crystallising capital gains and possibly resulting in buy/sell costs.
A perverse outcome of the

Future of Financial Advice, in its
original form, might be that dealers groups establish their own
superannuation funds, thus taking
on trustee obligations within their
own group. This would result in a
significant increase in the number
of APRA-regulated superannuation funds, increasing compliance
costs for the industry as a whole.
In some cases this might also be
perceived as resulting in a reduction
in member security, given the significant financial resources available
to the large wealth managers which
currently act as trustees for the
major retail superannuation funds.
A possible outcome in the
longer term could be that volumebased rebates continue to be paid
to dealer groups (which would
require a relaxation of the approach proposed in FoFA) but that
individual advisers would continue
to be remunerated on a fee-forservice basis, unrelated to business
volumes.
This would clearly involve some
complexity, as it would result in a
number of grey areas, such as where
advisers or advice practices are
rewarded on a basis that reflects the
dealer group’s overall profits.
Investment advice

The provision of initial and
ongoing advice on asset allocation
and investment option selection is
often seen as one of the key services
provided by advisers to their clients.
The use of separately managed accounts (within existing
retail platforms, through SMSF
platforms and using individually
directed portfolio services) is likely
to increase, particularly for highernet-worth clients.
This is a natural progression

from the use of model portfolios,
and the capital gains tax advantages
can be seen as a quantifiable “value
added” for clients as a result of the
adviser’s services.
Furthermore, regular reporting of the portfolio structure, asset
allocation and portfolio investment selections and divestments
(for example, under discretionary
portfolio services) fits well with a
remuneration structure based on
fees at regular review dates.
Products and services of this
kind also serve as a good defence
against competitors that offer
SMSF platforms with flexibility to
“self-direct” investments.
Offering equally flexible and
comprehensive platforms and products with the additional benefit of
professional financial advice can be
a winning combination.

41

Product research and
approved product lists

Much has been written about
the role of research ratings in some
of the recent, high-profile financial
collapses, such as Basis Capital and
Great Southern. Advisers need
access to deeper product research
than simply the ratings set by
external research houses. Research
obviously costs money and this
will be one of the many drivers of
consolidation within the industry
(as discussed above).
However, it is also likely to
lead to a more restricted approved
product list (APL), with a focus
on a comprehensive understanding
of the relatively smaller number of
products on the list, thus reducing
the chances of a sub-optimal product being available for consideration by clients.

For further information contact Carol Austin on 02 9251 6490
* Added value per annum since inception
Source: Contango Asset Management Limited - The historic
performance of the Manager is not a guarantee of the future
performance of the Portfolio or the company.

42

NEW REPORT:

Long Term Forecasts
2010 – 2025
The Australian Economy: Industry issues, trends
& long term forecasts
Despite a strong phase of investment last decade, Australia’s
infrastructure deficit has widened. Labour shortages, weak
productivity growth, strong demand and a recovery in property
markets will increasingly fuel inflation over the next two
to three years.
The mining investment boom has been a key driver of the
economy’s strong run of growth, but leaves little room for other
investment cycles to come through. In the absence of a major
setback to growth, capacity constraints are set to remain
a perennial problem for the economy.
Along with detailed numerical forecasts, Long Term
Forecasts 2010 – 2025 provides clear insight into what
is happening in the economy, where it is headed and what
developments are likely to influence its prospects.

Price: $2,145 for the hardcopy report or $3,300
inc GST for the full online service.
Includes an update report in February 2011 and access
to our team of economists to discuss the implications
of forecasts to business.

In practice, research provides
the core information to an adviser
and helps to select the APL. The
selection of a product from this list
by the adviser will always be done
whilst having regard to the client’s
needs.
Rice Warner has a keen interest
in the debate on research ratings as
we provide risk insurance product
research through COIN Inc and
Midwinter Reasonable Basis. In
our discussions with advisers who
use this software, we have always
been at pains to stress that our
research provides a sound analysis
of the risk insurance products provided by each insurer but that the
key determinant of the most appropriate product for an individual
client should be the client’s own
personal circumstances.
Modular services

The provision of holistic financial advice will continue to be the
backbone of most dealer groups
over the next five years. However,
there will be a significant number
of clients who will not need or
wish to pay for a holistic financial
plan. They may have a need for
advice on one particular financial
issue or strategy and be content
to seek advice on that issue alone,
albeit that they may be unaware of
other needs that may come to light
though a holistic advice process.
For these clients, modular
advice services will be developed,
under which advisers and their
clients can discuss the range of
financial needs and challenges,
and the client can then determine
whether they need holistic advice
or whether they wish to limit the
initial advice to an identified area
or areas, leaving other areas to be

considered at a later date.
Critics of the modular advice
approach say that it leads to
sub-optimal financial outcomes
for clients because not all the
required financial arrangements are
established after the initial advice
is provided. However, it is likely
to appeal to clients who would
otherwise not seek advice at all or
for whom consideration of multiple
financial issues simultaneously is
too daunting.
The modular approach to the
provision of financial advice is likely to extend the reach of financial
advice services into a broader client
base (such as “B” and “C” clients).
It is also worth mentioning that
superannuation funds (particularly
industry and public sector funds)
will become strong competitors in
this market through the development of intra-fund advice services,
particularly if intra-fund advice
is extended to include retirement
advice (as is proposed with FoFA).
There is clearly still a high
degree of uncertainty regarding
the detailed outcome of regulatory changes affecting the advice
industry, but the market is already
moving in a number of innovative
exciting directions which present
significant opportunities for dealer
groups and advisers to prosper over
the next five years.

Richard Weatherhead is a director of
Rice Warner Actuaries www.ricewarner.com

P R O FE SSI O N A L I S M

43

There actually is a silver bullet to
solve this problem
Robert MC Brown says industry bodies that strive to promote the commercial interests of members are probably
not going to win the battle for professional status

A

sk members to nominate what they
believe should be the most important
priorities of their professional body. The top of
the list will invariably include thought leadership
and the protection and promotion of the status
of their professional designation. Of course, how
members interpret what these priorities mean in
practice varies a great deal.
A common misconception is that the principal role of a professional body is to protect the
commercial interests of its members. When their
association acts in a manner that aligns with
their commercial interests, members will approvingly refer to that action as their professional
body showing leadership; but when they perceive
that their association has acted contrary to their
commercial interests, that action is likely to be
criticised as exhibiting a lack of leadership.
Faced with this political minefield, office
bearers in many associations soon learn that
making no decision at all on controversial questions has its attractions. Alternatively, decisions
are sometimes based on compromised principles
and the views of the noisiest or most powerful
group. In that way, leadership of a kind has been
demonstrated and the issue is neutralised.
The recent debate about financial planning
reform is one area where inaction or acquiescence to the status quo has its attractions. In the
case of the accounting profession, the independent standard setting body (Accounting Professional and Ethical Standards Board) has shown
considerable courage and leadership by issuing a
proposed mandatory ethical standard for the delivery of financial planning services (APES230).
The standard builds on the previous voluntary standard (APS12) and reflects the princi-

‘Making no
decision at all
on controversial
questions has its
attractions’

ples in the Institute of Chartered Accountants’
thought leadership paper, Reinventing Financial
Planning (published in 2007).
APES230 (which has been issued as an
Exposure Draft) asserts the timeless professional principles of independence, avoidance (not
just disclosure) of conflict of interest, and the
supremacy of the public interest. As a result, all

forms of percentage-based remuneration, including commissions, asset-based fees, production
bonuses and soft dollar benefits, are to cease
from July 1, 2011 (or such other date agreed by
the Board).
All of that will sound eminently reasonable,
unless you’re an accountant financial planner
with a large book of trailing income that fails
to satisfy the new standard. Such a planner
might take APES230 as a personal affront to
his integrity. He might suggest that his professional body is not showing leadership because it
is not supporting his right to earn an income in a
manner agreed with his clients. And he may even
suggest that the manner in which he earns an
income is none of his profession’s business, and
that his professional body should not interfere
with his career.
Whilst understandable, these reactions
reveal a misunderstanding of the principal role
of a true professional body. That role is to adopt
and enforce professional and ethical standards
and the sometimes commercially inconvenient

44

P R O FE S S IO NAL IS M

consequences that flow from them (in this case,
the removal of remuneration-based conflicts of
interest). By so doing, the community will trust
accountants to act in the public interest and
accordingly will continue to allow the profession
the privilege of self-regulation.
Contrast this with the wider financial planning industry which faces the prospect of ever
increasing legislative regulation due to a lack of
community trust in the industry’s participants
(whether or not that is a fair conclusion).
This point is best illustrated by a simple
analogy. Imagine going to your local medical
practitioner who tells you that he’s changing the
basis of charging fees to his patients. Instead
of a flat fee for service per consultation, he says
that from now on he will charge a fee calculated
by reference to a percentage of the value of the
drugs he prescribes.
Would you agree to that proposition? After
all, the new charging basis is a “fee for service” as
understood in the financial planning industry;
the fee is disclosed, it’s disclosed in dollars, it can
be turned off at any time by the patient, and it’s
not a commission paid by a product manufacturer. In addition, the doctor is well qualified, he is
licensed to practise by the regulator, he is subject
to a government-controlled compliance regime,
he attends regular professional development
activities and he’s committed to a Professional
Code of Conduct and Ethics.
Do you trust him to act in your best interests, or would you be suspicious that under his
new “fee for service” arrangement, your doctor
might be tempted to over-prescribe drugs? The
answer is obvious. While you might continue to
trust him to a point, you would not do so without doubting his motives and you’d always have
an eye on his prescription book.
The medical profession would not dare
to suggest a “fee for service” like this, but most
financial planners are suggesting it. That is,
they are proposing to remove commission,
replace it with a percentage-based fee, and then
misleadingly call the percentage-based fee a
“fee for service”. They claim that this will create
unambiguous trust. It won’t. Calling it a “fee for

service” won’t make any difference, except that it
will fool a few people into believing that planners
are acting without a conflict, when they aren’t.
Whether you’re a doctor, a lawyer, or an
accountant, the fundamental ethical principle is
the same. Trying to earn trust while acting with
a remuneration-based conflict of interest simply
won’t work, even if the conflict is disclosed. It’s
not about disclosure of conflicts; it’s about avoidance of them.

‘Whether you’re a
doctor, a lawyer, or
an accountant, the
fundamental ethical
principle is the
same’
Until the financial planning industry comes
to accept that proposition, the industry will
continue to suffer legislative regulation, and will
never earn the professional trust and status that
many of its members deserve.
The implementation of APES230 may
prove inconvenient for some accountant financial
planners because they may have to unravel
longstanding commercial relationships. That being so, the accounting bodies have an obligation
to offer members a workable implementation
process.
However, adoption of the standard’s principles will transform financial planning into a
trusted, legitimate, mainstream and growing segment of the accounting profession. The income
of these financial planning practices will become
predictable and sustainable and their value will
grow because they will be built on solid commercial and professional foundations, not on the unpredictable movements of the stock market and

the imperatives to sell a product and accumulate
funds under management.
Unless the financial planning industry as a
whole adopts the principles in APES230, the
industry will soon fragment into a growing segment, consisting of those who have adopted the
highest ethical standards (free of remunerationbased conflicts), and a contracting segment,
which will continue to be heavily regulated and
treated by much of the public as a product sales
force.
It’s often said by commentators that “there’s
no silver bullet” to reform in the financial
planning industry. Actually, there is. Remove
remuneration-based conflicts and the industry
will soon transform into the profession that it
claims it wants to be.

Robert MC Brown is a chartered accountant
with over thirty years’ experience in taxation,
superannuation and financial planning. He is
Independent Chairman of the ADF Financial
Services Consumer Council and a member of the
Government’s Financial Literacy Board.

Australia • Asia • Europe • Middle East • The Americas
Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chiﬂey Tower, 2 Chiﬂey Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian
Financial Services licence (“AFSL”) in respect of the ﬁnancial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended
for use by Retail Clients, as deﬁned by the UK FSA, or as deﬁned in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Conﬁdence, and the bighorn sheep logo is a registered trademark
of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.

DP Page - Australia Independence

46

TEC H N I CAL

Are reserves worth the effort?
Louise Biti explores how reserves for self-managed super funds are set up, and when they might be useful

R

eserves can be used by self-managed
superannuation funds (SMSFs) to
provide flexibility for the distribution of benefits
across members of the fund. In so doing, reserves
may create taxation advantages or provide strategic opportunities such as:
• Inject liquidity through the use of insurance policies to raise the cash to pay out death
benefits without needing to sell certain assets;
• Allocate contributions (made in June)
across two financial years to avoid an excess
contribution assessment;
• Fund insurance needs without an external
insurance policy;
• Boost a death benefit payable through
anti-detriment provisions;
• Transfer wealth across generations and
potentially minimise tax on death benefits to
adult children.
Setting up reserves can add complexity and
expense to the fund. So before using reserves it is
important to decide the purpose, whether other
avenues exist to achieve the same advantage, and
the costs or disadvantages. Just because a reserve
is possible does not necessarily mean it is a good
idea.
How reserves are set up

Reserves are unallocated amounts and form
part of the fund’s general assets - that is, the
money in reserves does not belong to an individual member.
Section 115 of the Superannuation Industry
Supervision (SIS) Act 1983 allows the trustee of
a super fund to maintain reserves unless prohibited under the governing rules of the fund. The
Trust Deed does not have to specifically allow or
mention the establishment of reserves; rather it
just should not prohibit their use.
However, it may be prudent to ensure the
governing rules of the fund provide directions
on:

Louise Biti

1. Allowing the creation of reserves.
2. Enabling the trustee to provide a purpose
and rules around a reserve.
3. Policies for allocations to and from a
reserve.
Benefits cannot be transferred out of a
member’s account into a reserve. Reserves need
to be built up from insurance proceeds paid to
the trustee or from investment earnings. These
amounts can be added to a reserve account
instead of a member’s account.
Example
Smart Family SMSF has set an
investment crediting rate of 8 per cent
for members’ accounts. Earnings above
this rate are allocated to a reserve
account. Therefore, if the SMSF earns
12 per cent for the year, 8 per cent will
be allocated to member accounts and 4
per cent will be allocated to a reserve.

Amounts added to a reserve from investment
earnings are still part of the fund’s taxable income and are taxed at 15 per cent. The exception

is for segregated pension reserves used to meet
current liabilities, as these earnings are tax-free.
Section 52(2)(g) of SIS requires that if
reserves exist, the trustee must formulate and
give effect to a reserving strategy to cover the
prudential management of the reserves.
The reserving strategy should be documented and reviewed at least annually. It should
consider:
• The purpose of reserves and how they
will be created.
• The investment strategy for the reserves
- this can be a separate strategy for each reserve
or a strategy to cover all reserves. It is separate to
the investment strategy for the member accounts
but should be consistent with that strategy.
• The amount that is considered appropriate to be held within each reserve.
• How allocations will be made from the
reserve.
The trustees also need to decide whether the
assets of the reserves will be segregated or not
and maintain appropriate accounting records.
Set-up steps
1. Check that reserves are not prohibited
under the Trust Deed or governing rules.
2. Develop a reserving strategy for reserves
and decide if assets will be segregated.
3. Build reserves using investment earnings
or insurance proceeds (contributions can
be used temporarily). Accounting records
should show the build-up of reserves.

The impact on contribution caps

Amounts allocated from a reserve to a member’s account will be assessed as a concessional
contribution against the concessional contribution cap (ITAA97 sec 292-25(3)) unless:
• the amount is allocated across all members (or all members in a particular class) in a

TEC H N I C A L

fair and reasonable manner; and
• the amount allocated in the financial
year is less than 5 per cent of the value of the
member’s interest in the SMSF at the time of
allocation.
It is up to the trustee to prove that any allocation is “fair and reasonable”. This could be
determined by:
• equal allocations to each member, or
• proportionate allocations to each member
based on account balances or membership period.
If the allocation is assessed as a concessional
contribution, the whole amount allocated counts
against the contribution cap, not just the amount
above 5 per cent of the account balance.
Two other exceptions apply:
• Amounts allocated from reserves to satExample:
Scott and Bec set up an SMSF and
both became members at the same
time. They are both over age 50. Scott
has a balance of $400,000 and Bec has
a balance of $100,000.
Scott receives a $10,000 allocation
from a reserve but no allocation
is made to Bec. Although this
represents less than 5 per cent of
Scott’s account balance it may not
meet the requirement to be a “fair
and reasonable allocation”. If not, it
will be deemed to be a concessional
contribution and count against Scott’s
concessional contribution cap.
Assuming his other concessional
contributions for the year are $30,000
he will still be under the cap and he will
not create an excess contribution.

‘A question has
existed over
whether allocations
can be made to a
pension account’
isfy a pension liability (including a commutation)
do not count towards any contribution cap.
• Non-concessional contributions paid into
a contribution reserve will count against the nonconcessional contribution cap when allocated to
the relevant member’s account. These contributions need to be allocated within 28 days from
the end of the month in which the contribution
was made.
A question has existed over whether allocations can be made to a pension account or
whether they can only be made to accumulation accounts. A National Tax Liaison Group
superannuation technical sub-group meeting in
September 2009 supports the view that allocations can be made to a pension account.
The allocation to a pension account is not
deemed to be a contribution or rollover for SIS
purposes and so can be added to a pension that
has already commenced, but it can count as a
contribution against the concessional contribution cap if the amount exceeds 5 per cent of
T:200 mm
the balance of the member’
s interest and is not
allocated in a fair and reasonable manner.

47

Tips:
1. Limit allocations from reserves to
less than 5 per cent of each member’s
account if you wish to avoid the
potential for an excess contribution.
2. The 5 per cent limit applies to each
reserve. So building money across
several reserves may help to increase
allocations. This should be weighed
up against the cost and administrative
obligations of maintaining a number of
reserves.

If a member has a pension account and an
accumulation account, each account is deemed
to be a separate interest and the allocation needs
to be fair and reasonable across both interests, as
well as across the interests of other members.
Allocations made to an accumulation account will add to the taxable component. An allocation made to a pension account will be added
in the same proportions that already apply to the
pension account.
Reserves are important as an estate planning tool to shift wealth across generations and
provide taxation concessions, but they will add to
the expense of the fund and may only add marginal value to some clients. Advisers and trustees
need to be aware of the interaction with tax law
in relation to allocations and the contribution
caps.

Louise Biti is a Director of Strategy Steps, an
independent company providing strategy support to
financial planners. For more information visit
www.strategysteps.com.au

Australia • Asia • Europe • Middle East • The Americas

no.12
At T. Rowe Price, we believe it’s critical to research investment opportunities
from the ground up. Our dedication to hands-on, fundamental research is just
one way we seek to avoid unnecessary risks and ﬁnd true long-term opportunities
for our clients.
Under here?

troweprice.com.au/truth

Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chiﬂey Tower, 2 Chiﬂey Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold
an Australian Financial Services licence (“AFSL”) in respect of the ﬁnancial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws.
This material is not intended for use by Retail Clients, as deﬁned by the UK FSA, or as deﬁned in the Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Conﬁdence, and the
bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United Kingdom.

AS Strip - Australia Research

48

RES P O N S IBL E INVES TING

What you need to know before
you start
Investor interest in responsible investment (RI) is booming, so how can you integrate RI advice into your
practice? Megan Lewis talks to some advisers who know

O

ffering responsible advice on responsible investing as part of your practice
has some definite advantages. According to
advisers who’ve elected to set up dedicated RI
advice practices, it provides higher levels of job
satisfaction and deeper adviser-client relationships. As more investors look for investments
that are environmentally and socially sustainable
as well as profitable, an RI advice offering can
give you a competitive edge.
Consider the benefits

“The great benefit of building a business
about RI is that it engages clients at the level of
their core values - so that it is a much ‘thicker’
relationship than one based on just financial
objectives,” says Ethinvest managing director,
Trevor Thomas.
“For our staff as well as our clients, operating
in the RI space has provided additional levels of
satisfaction - not just the pleasure from doing
something well, but the knowledge that what
we are doing has value for our client and beyond
them for the society and the natural environment.”
Dealer group or independent?

Ethinvest has been operating as an advisory
practice offering ethically screened investment
portfolios since 1989. As such it was the first
specialist RI practice in Australia and has been
operating under its own licence since 1989.
Thomas says having its own licence means
Ethinvest can be “in control of its own recommended list and can move nimbly when required
to adjust that list”.

“Ethinvest has always focused on direct equities and having our own licence has facilitated
that. It also puts us in control of our marketing
strategies and has allowed us to build a good
niche brand. It has also allowed us to pursue
broader goals, such as shareholder activism,
without needing to seek approval from a licensee,” he says.
Another specialist RI group, Ethical Investment Advisers, has been operating under its own
licence since 2004 and offering RI advice since
2006.
According to an adviser with the group,
Karen McLeod: “Our founding directors wanted
to have an independent licence. This removes
any conflict of interest and allows us to recommend the most appropriate investments for our
clients.”
“When working as part of a larger dealer
group I often found that clients with strong ethical values were not catered to on our approved
product list (APL). By having our own licence
we are able to cater to these investors because we
research a much wider range of RI funds.
“I also believe that by having our own licence
we can act more swiftly than a larger dealer
group to add or remove investments from our
approved product list.”
Other RI advisers are confident they can
build their specialisation and stay part of a bigger, mainstream dealer group.
Steven Putt, managing director of Viridian
Wealth Management, has developed a practice
that specialises in RI but has elected to stay under the umbrella of Charter Financial Planning.
He’s been offering RI advice for a total of five

‘People who may
have initially said
that they were not
interested have
come around’
years - the first six months with another dealer
group.
“I left there due in part to the inability to offer RI advice, and the reluctance of the management to consider it. I was told at one point to
‘forget that hippy s**t’,” he says.
Charter has a range of RI products on its
APL, according to Putt, “and they allow us to
use products that are not on the APL if they are
in the best interest of clients, and have a quality
history and research”.
Rather than seeking to get additional RI
products on the APL, Putt takes a case-bycase approach which gives him an “edge” when
researching and deciding what to recommend to
RI clients.
“We can get one-off approval that is specific
to individual clients and specific products. While
it means that sometimes we need to go back to
the research team, we are consistently having
to justify the quality and why a product suits a
client.
“I think that we are always on our toes and

RESP O N SI B LE I NVES T I N G

‘Ultimately you are
there to give them
advice that suits
their objectives and
values’
able to make an argument outlining why something is suitable [from] a morals standpoint and
also financially.”
Private and Priority Financial Planning
is part of the BT Financial Group and senior
financial planner Colin de la Nougerede says BT
has encouraged the process of offering RI investments over the past five years.
“As the investment and social environment is
changing and investors’ attitudes regarding ethical, environmental and moral issues are becoming more aware, having the avenue to provide
investment opportunities to cater for this change
while meeting investors’ needs for wealth creating is important,” he says.
Who do you talk to?

Trina Wood, from Green Associates (within
the Axa dealer group) says it’s worth asking all
new clients about their interest in RI portfolios.
“The trick is finding how ‘green’ they are.
Some clients want to add an RI fund to their
ordinary portfolio while others want to invest

solely in RI funds,” she says.
Putt concurs it’s worth talking to all clients
about RI. “We have found that people who may
have initially said that they were not interested
have ‘come around’ as time went by. It is still not
unusual to come across people who say, ‘I didn’t
realise you could do that’, in regard to investing
in line with your values.”
Putt has found, however, that despite a
greater “greenness” in society, that apathy can
sometimes prevail.
“We saw recently that 12 per cent or so of
the population are happy to vote green, but only
a small fraction of money invested is ‘green’.”
Tips from the frontline

Thomas says he wishes someone had told
him back in 1989 that “we were five or 10 years
early”.
Wood says she wishes someone had given
them a secret formula for marketing their RI
offering, particularly to existing clients.
McLeod says the most important tip she
could give to someone starting out in RI is to “really listen to what’s important to your clients”.
“Ultimately you are there to give them advice
that suits their objectives and values,” she says.
“If your dealer group won’t allow you to
recommend the product which best suits your
client, be upfront with your client and tell them.
Make sure you give your dealer group any feedback from both you and the client.”
Putt’s tip is to “expect the unexpected”.
“People you think would be really interested
T:200 mm
in ethical and responsible
investment, who just
are not, and people that would not appear to be,

49

who are,” he says.
The upside

Irrespective of whether they have an independent licence, or offer RI under the banner of
a larger dealer group, all the specialist advisers
report healthy growth from their RI client base.
Ethinvest has 60 per cent of its business in
RI. Putt reports 20 per cent of his business is
RI “and growing”. Private and Priority currently
has between 5 to 10 per cent, “but we hope to
increase this with more awareness”, de la Nougerede says.
Wood, from Green Associates, which only
started to build specific RI portfolios for its
clients last year, says RI currently represents a
very small percentage of their business.
“However, we are looking to grow and
develop marketing strategies around our RI
portfolios,” she says.
McLeod says 30 to 40 per cent of her total
client base receives RI-related advice but “this
is growing each year, as 90 per cent of my new
business is RI-related”.

Megan Lewis is marketing and communications
director at the Responsible Investment Association
of Australia (RIAA)

Australia • Asia • Europe • Middle East • The Americas

no.15
At T. Rowe Price, we believe teamwork is essential. With a collaborative team of
over 350 investment professionals* around the globe, our best ideas are shared
across countries, sectors, and asset classes, for the beneﬁt of all of our clients.
troweprice.com.au/truth

Issued by T. Rowe Price Global Investment Services Limited (“TRPGIS”), Level 29, Chifley Tower, 2 Chifley Square, Sydney, NSW 2000, Australia. TRPGIS is exempt from the requirement to hold an Australian Financial Services licence (“AFSL”)
in respect of the financial services it provides in Australia. TRPGIS is regulated by the FSA under UK laws, which differ from Australian laws. This material is not intended for use by Retail Clients, as defined by the UK FSA, or as defined in the
Corporations Act (Australia), as appropriate. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in Australia and other countries. This material was produced in the United
Kingdom.T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International, Inc., T. Rowe Price Global Investment Services Limited and T. Rowe Price (Canada), Inc. *As of 30 June, 2010.

ReDeﬁned by:
diversiﬁcation across 50 blue chip stocks
the liquidity and transparency of an ETF
a tax effective investment
a new index tailor made to meet the
needs of Australian investors
Russell, world leaders in index design
and portfolio construction.

It’s time to ReDeﬁne Dividends. Learn more about RDV,
visit www.russell.com.au/etfs or email ETFenquiries@russell.com
The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market
average, however high dividends cannot be guaranteed. Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication
provides general information only and has not been prepared having regard to your objectives, ﬁnancial situation or needs. Before making an investment decision, you need to
consider whether this information is appropriate to your objectives, ﬁnancial situation and needs. Any potential investor should consider the latest Product Disclosure Statement
(PDS) for the Russell High Dividend Australian Shares ETF (RDV) in deciding whether to acquire, or to continue to hold, units in RDV. Only persons who have been authorised
as trading participants under the Australian Securities Exchange (ASX) Market Rules can apply for units in RDV through the latest PDS. Investors who are not Authorised
Participants looking to acquire units in RDV cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or ﬁnancial adviser.

SP EC I AL RE PORT

51

A new phase begins in ETF growth
Growing confidence in the ETF sector is leading to a new round of product innovation. But as Simon Hoyle
reports, there are still some misunderstandings about how these investment vehicles work

T

he first phase of the development of the exchangetraded fund (ETF) market in Australia is drawing to a close. While
still small compared to other types
of managed investments, ETFs are
clearly here to stay, and will build
on their toehold in the years ahead.
The financial planning industry’s early adopters have moved, and
there is close to $4 billion invested
in the products. Now, ETF providers are starting to think about how
to tailor the basic ETF structure
to meet the growing demand from
investors and advisers.
In May this year, Russell
launched the Russell High Dividend Australian Shares ETF. What
sets this ETF apart from many of
the others is that it was created to
meet the specific demands of selfmanaged super funds (SMSFs),
identified in extensive research
carried out by Russell.
That research found SMSFs
wanted five things from an investment: income; a high level of
franking credits; capital growth;
diversification; and capital protection.
Amanda Skelly, Russell’s
director of ETF product development, says the company thought

it could satisfy four of those five
requirements. In response, it commissioned Russell’s in-house index
team to custom-build an index - the
Russell Australia High Dividend
Index - and then it built the ETF to
track the index.
Skelly says the index comprises
50 stocks taken from the 100 largest companies listed on the ASX.
This ensures that the ETF tracks
an index made up of very liquid
securities - a critical element in how
an ETF is structured and in its efficient operation.
Exactly where liquidity exists in
the ETF market is an issue that is
still often misunderstood. Liquidity in an ETF exists at two levels:
market liquidity, where shares in
ETFs are traded between investors
like any other shares; but a second
layer exists where market makers
and authorised participants operate
to ensure an orderly market.
This “dual-layer” liquidity profile
is what helps set ETFs apart from
unlisted managed funds and listed
investment companies (LICs).
Andrew Baker, managing partner of Tria Investment Partners,
says an ETF is “different to both a
managed fund and a LIC - so let’s
look at it in those terms”.

Amanda Skelly

“It has the same fundamental
structure as a managed fund: it’s a
trust, it has a constitution, it has
an RE [responsible entity], it’s
open-ended, and trades at NAV
[net asset value]. So in that sense
it looks like a managed fund. But
as we know, it’s listed on the stock
exchange, it trades all day - instead
of at a single price at the end of the
day - and it’s liquid.
“A LIC is a company, not a
trust, so it’s taxed at the company

tax rate; it’s closed-ended and that
means that the price is determined
on the day by the number of buyers
and sellers. There’s kind of a reference to NAV, but it’s indirect. It can
trade at a premium - so AFIC and
Argo tend to trade at a little bit of a
premium - but most of them tend
to trade at discounts, and those can
be very deep. If you look at something like a Contango Microcap, 40
per cent discount.
“And that’s the problem. There’s

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52

S P EC I A L REP O RT

no certainty about what that number is going to be when you need
to exit. That’s been a real problem;
there’s been a lot of capital raised
in LICs over the years, and there’s
been an unfortunate tendency for
these things to go straight to a deep
discount, and they stay there, and
we’re all trying to work out how we
solve that, and it hasn’t been a great
investor experience.”
Baker says ETFs resolve a
number of issues related to both
unlisted managed fund and LIC
structures. He says they are far
more accessible and far more
flexible in certain ways, and they
overcome the premium/discount
issue of LICs.
One of the big questions often
raised about ETFs is why they

trade so consistently at NAV, Baker
says.
“You’d be amazed - we get very
long-experienced people at very
senior levels in the industry who do
not understand why these things
trade at NAV,” he says.
“It’s because the way money
moves in and out of these is very
different [to managed funds and
LICs].
“There’s two ways of buying an
ETF unit. If you’re a small investor, you log in to your CommSec
account and you buy and trade it
like any other stock. Exactly like a
BHP share. You look on the screen,
there’s buyers and sellers stacked up
on either side, you put in your order
and off you go.
“If, however, you’re an institu-

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tion, with a big order, you don’t do
it that way. Say you want to buy
$100 million worth of an ASX
50 ETF, for example, you’ll call up
your broker, and they will call up a
market maker, who is an authorised
participant, and say they want to
buy $100 million. And what they
do as a first step is go out into the
market and buy $100 million of the
stocks that make up the ASX 50, in
those exact proportions. It sounds
complicated, but for big instos
it’s a no-brainer; they do it in two
seconds.
“So as a first step they’ve got
$100 million of all the stocks in the
ASX 50. Then they go to the ETF
and say, OK, I want $100 million
of the units; here’s $100 million
of your portfolio. So it’s like an in

specie transfer at that point.
“And that’s how new units are
created. It’s completely different
from your unlisted managed fund,
where you write out a cheque, it
goes in at the end of the day, at that
day’s price, it gets processed in a
few days, money kind of leaks into
the trust and the manager decides
whether to invest it or not.
“That’s kind of critical, because
that ultimately explains why these
things [ETFs] trade at NAV,
because exactly the same works in
reverse. If I want to get out of this
thing - I want to sell my $100 million - I can present those units, and
I can obtain $100 million worth of
stock, at NTA. The critical thing is
you have direct access to the NTA,
to the assets.

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53

Robyn Laidlaw

“As soon as a price starts to deviate on the market from the NTA,
there’s an arbitrage opportunity. If it
starts to drift away, the professional
market makers can go in and buy
up all those units, present it to the
ETF, and get the underlying stock
at NTA. That’s why it works.
“As simple as the concept is,
you’ve got direct access to the assets
of the ETF. As long as you’ve got
that, this thing has to trade around
NTA.”
Robyn Laidlaw, ETF product
manager for Vanguard, says the job
of a market maker is “exactly what
the name says: to make a market
and to provide liquidity”. Liquidity is a very important element in
enabling ETFs to trade closely to
NTA, and in keeping the bid/offer

spread as narrow as possible.
“Investors and advisers need to
think about two levels of liquidity
with ETFs,” Laidlaw says.
“There’s a level of liquidity in
relation to the volume that’s being
traded, but in an ETF the real level
of liquidity is the liquidity of the
fund in which you’re investing.
“The authorised participants are
in the market, competing on price.
So that provides some competitive
tension in the marketplace around
how it’s priced. If the market price
moves out of line with the NAV,
those authorised participants can
go in and create new units.”
Laidlaw says the liquidity of the
ETF itself is related to the index it
tracks. The more liquid the securities that make up the index, the

easier it is for the market maker to
do its job.
“ETF units are created by the
exchange of the stocks in the fund,
with the same value of ETF shares
going back out to the marketplace,”
Laidlaw says.
“The ability of the market
maker to deliver those shares to
Vanguard also supports the liquidity of the product.
“So there’s two layers. Advisers
should remember there’s this other
layer.
“Liquidity is important, because
it’s the ease with which investors
can get into or out of an investment.”
Laidlaw says that with any
investment product, “advisers ultimately want to know, can my clients

get into and out of this product?”.
“During the GFC, things we
thought we could get into and out
of easily, that wasn’t the case.” But
even international ETFs listed on
the ASX tend to be “very big funds”
that track highly-liquid indexes.
Baker says a key challenge for
any ETF provider is to make sure
the bid/offer spread remains tight.
In the early stages of ETF development, spreads tended to widen, and
that meant buyers were sometimes
paying above NTA to get into the
ETFs, and receiving less than NTA
when they sold - the very shortcoming of the LIC structure that ETFs
were meant to overcome.
He says there are a number of
factors that influence the spread.
One is the nature of the assets the

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54

S P EC I A L REP O RT

Andrew Baker

ETF invests in, and that’s determined by the
index that the ETF is built to track.
Russell’s Skelly says that ETFs that track
indexes comprised of large, liquid securities tend
to have relatively narrow spreads. ETFs that
track indexes made up of less liquid securities
(including equities in emerging markets) tend to
have wider spreads.
“The more liquid, the better [narrower] the
spread, generally,” she says.
“People are concerned about, can I get my
money out if I need to? It is [dependant] on the
underlying liquidity. The second question is: Do
I get the price I want?”
Baker says spreads are also affected by
whether the ETF that an investor buys invests in
the market of their home country.
“One of the big challenges has been for crosslisted ETFs,” Baker says. “That’s where the ETF
is domiciled somewhere else, and it’s cross-listed
here. The assets are being managed somewhere
else, in a different time zone - that’s the important part.
“One of the challenges that iShares experienced, in particular, [was that] its ETFs were
foreign ETFs and during our trading day most

of those are closed. Therefore the market makers
have a bit of a risk because if people are buying
and selling markets during our day, they [the
market makers] can’t actually move on that until
the next trading day opens.
“That means they are not going to run as
tight a spread as they would for a locally-managed ETF. Certainly in the early days there were
some real issues around the spreads in those
iShares ETFs.”

‘There’s not a
massive profit
margin in these
things; you need
massive scale’
Laidlaw says Australian-listed ETFs that invest in offshore markets will always have greater
pressure on their spreads.
“For some of the international ETFs - which
are trading during Australian hours, but investing in the US market, for example - what we’re
seeing there is there’s less ability to know with
such certainty what they’re worth, because the
US market is shut,” Laidlaw says.
Futures markets give authorised participants
and market makers some idea of what the US
market is likely to do when it next opens, but it
can never be completely accurate.
“Whenever anyone is making a market and
taking a risk, that’s got to be reflected in the
spread,” Laidlaw says.
There are three main ETF players in the

local market, and they are likely to remain the
dominant players for the foreseeable future.
There are also smaller players in the market - notably ETF Securities, which offers a gold-based
ETF and has found some investor support.
The big barrier to entry is scale. Baker says
that in all developed markets where ETFs are
offered, there are three to five successful players,
and in most markets the top three generally control about 70 per cent of the ETF assets. Baker
says the average gross fee on an ETF is 35 basis
points. Laidlaw says the fee on the Vanguard
US Total Market Shares Index ETF is 7 basis
points.
Competition between ETF providers does
not necessarily lead to innovation in fund management styles or techniques; ETFs passively
track market indexes and so the result of competition is usually lower prices for consumers.
“There’s not a massive profit margin in these
things; you need massive scale - you need billions; lots of zeroes,” Baker says.
The sheer volume of funds needed to run an
ETF profitably means they will remain in the
realm of major institutions, and it’s extremely
unlikely that some of the things commonly done
by dealer groups to capture some of the margin
associated with managed funds will succeed in
the ETF space.
“It’s just too big a scale game,” Baker says.
“Even things like white labelling and jointventuring look pretty tough. The skills are very
different as well. It’s not worth dealing over
revenue shares if the revenue pie is only 25 to 30
basis points to begin with.”

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The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market
average, however high dividends cannot be guaranteed. Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication
provides general information only and has not been prepared having regard to your objectives, ﬁnancial situation or needs. Before making an investment decision, you need to
consider whether this information is appropriate to your objectives, ﬁnancial situation and needs. Any potential investor should consider the latest Product Disclosure Statement
(PDS) for the Russell High Dividend Australian Shares ETF (RDV) in deciding whether to acquire, or to continue to hold, units in RDV. Only persons who have been authorised
as trading participants under the Australian Securities Exchange (ASX) Market Rules can apply for units in RDV through the latest PDS. Investors who are not Authorised
Participants looking to acquire units in RDV cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or ﬁnancial adviser.

56

S E LF- M ANAGED S UP ER

A refresher course on selfmanaged super fund pensions
In the second in a series of articles, Tony Negline examines rolling over and refreshing pensions

P

ensions, and the various different transactions which can occur with them,
always present problems for superannuation
fund administrators. This is particularly the case
with self-managed super funds.
(In drafting this article I have relied on a
paper written by my colleague, Michael Hallinan, senior counsel at Townsends Business and
Corporate Lawyers.)
Before we delve into the specific issues that
apply to these transactions, there are a couple of
points common to both rolling over a pension
and refreshing a pension.
Rolling over or refreshing some part of a
pension’s account balance to another super fund
will affect future pension income payments.
Obviously if all of a pension’s account balance is
rolled over or refreshed then all future income
payments from the original pension will cease.
Before a pension’s account balance can be
rolled over or refreshed, the super fund’s trustee
must make sure that the pro-rata minimum pension has been paid. The account balance transferred cannot be used to satisfy this minimum
income payment rule.
From the financial services law point of view,
the amount rolled over is deemed to be similar
to the purchase of a financial product. This
means that if a licensed financial adviser has
recommended the rolling over or refreshing of
the pension, then they should issue a Statement
of Advice and detail why rolling over or refreshing a pension is an appropriate course of action,
as well as all the costs involved in the transaction.
Depending upon the relationships involved,
some financial advisers might be able to rely on
replacement product advice rules. Typically these

‘It’s important to
understand how the
tax-free component
of the new pension
will be calculated’
rules reduce the amount of material that has to
be disclosed again to an investor.
Rolling over pensions

The purpose of this transaction is to change
pension providers, merge two or more pensions
or to alter the features of a pension.
Most pensions commenced in the past ten
years can be rolled over to a new super fund,
including Transition to Retirement (TtR) pensions. It’s important to make sure the rules of a
super fund and the pension itself allow it to be
stopped.
Once the lump sum has been transferred,
some people recalculate the annual required
minimum pension payment. Ordinarily this
minimum pension amount is worked out each
July 1. The super laws, however, don’t allow the
minimum pension to be recalculated.
The amount rolled over will not be a contribution for super law purposes.
This means that the super law contribution
rules (especially relevant for those aged at least
65) do not need to be satisfied. The lump sum’s

preservation status however will remain unchanged. This means any preserved benefit used
to pay a TtR pension will remain a preserved
benefit.
Some super commentators argue that before
a pension’s account balance is rolled over to a
new super fund, its account balance is technically
moved from the 0 per cent pension phase and
into the 15 per cent accumulation phase. This
means that if the existing super fund has to sell
any assets before paying the new super fund the
rolled-over account balance, capital gains tax
(CGT) might be payable on any gains.
Super fund trustees should proceed carefully
on this point and might want to consider getting
a Tax Office private binding ruling to ensure that
there are no nasty surprises.
If CGT is payable, then the super fund
should deduct this from the lump sum before it
is rolled over.
The originating super fund must tell the new
super fund the “taxable” and “tax-free” components. Any untaxed element in the rolled-over
value will be taxed in the receiving super fund.
These untaxed elements typically arise from
public sector and government employee pension
schemes.
In most cases, rolling over a pension to another super fund will involve the new super fund
issuing a financial product.
This means that the new super fund will
need to receive an eligible application form from
the new member and must also issue a Product
Disclosure Statement.
A nine-step process is used to implement
this transaction in the originating super fund:
1. Member requests rollover or notifies that

SE LF- M AN AG E D SU PER

Refreshing a pension

Tony Negline

they have the right under the terms of their
superannuation pension;
2. The trustee confirms entitlement to rollover the pension;
3. The trustee issues a Pre-payment Statement - a specific ATO issued document
4. The Pre-payment Statement is completed
and signed by the super fund member and
returned to the trustee;
5. If required, the trustee works out what
the pro-rata minimum pension payment should
be just before the amount is rolled over;
6. The trustee sells/transfers assets to effect
the rollover;
7. The trustee adjusts the original pension’s
account balance; If required, the trustee issues
relevant exit information to the member;
8. For SMSFs, if the member has left, then
this will trigger a change in trustees.
9. In most cases the member must resign as
a trustee and the ATO must be notified of this
change in trustees. For individual trustees this
would trigger changes in asset ownership.

Refreshing means rolling back one or more
pensions and then commencing a new pension.
Before the new pension starts the old pension
money might also be merged with non-pension
or accumulation assets in the super fund for the
same member.
There are three reasons to contemplate these
transactions: injecting new capital into a pension; reducing the tax applying to the accumulation assets; and avoiding the additional costs of
running two or more pensions.
Most pensions commenced in the past ten
years can be refreshed, including TtR pensions. It’s important to make sure the rules of a
super fund and the pension itself allow it to be
stopped.
The amount transferred back to the accumulation phase will not be a contribution for
super law purposes. This means that the super
law contribution rules (especially relevant for
those aged at least 65) do not need to be satisfied. Its preservation status however will remain
unchanged. This means any preserved benefit
used to pay a Transition to Retirement pension
will remain a preserved benefit.
It’s important to understand how the
tax-free component of the new pension will be
calculated.
If the member doesn’t have an accumulation
interest in the super fund then it would appear
that the tax-free component of the new pension
will be the original tax-free component of each
rolled-back pension.
If the member does have an accumulation
interest in the super fund then the rolled-back
pension account balance and the accumulation
interest will form a single accumulation interest
in the fund. The tax-free percentage of each
income payment will therefore be based on the
tax-free component of this single accumulation
interest.
If a super fund has used asset segregation,

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then the super fund’s financial accounts will
need to accurately show the movement of assets
between the pension and non-pension segments.
A large number of assets can make this process
quite messy.
The new pension will involve the super fund
issuing a financial product. This means that
the super fund will need to receive an eligible
application form from the new member and in
most cases must also issue a Product Disclosure
Statement.
An eight-step process is used to implement
refreshing pension assets:
1. Member requests commutation of existing
pension(s) and commencement of new pension;
2. The trustee confirms entitlement to perform these transactions and election of member
to take a lump sum payment out of the fund and
not additional pension payments;
3. If required, the trustee works out what the
pro-rata minimum pension payment should be
just before the original pension is commuted;
4. The trustee commences the new pension;
5. The trustee determines new pension’s taxfree component and pension limits;
6. The trustee issues the pension documentation;
7. If required the trustee re-segregates pension assets;
8. The trustee closes out the existing pension
account, opens new pension account and adjusts
the member’s accumulation interest.

ore and more self-managed superannuation fund (SMSF) trustees
are engaging in limited recourse borrowing
arrangements (formerly called “instalment warrant” borrowings). Many SMSF trustees borrow
from banks, but a sizeable number borrow from
related parties. Related parties lending to SMSF
trustees can be a very powerful strategy. However, it creates more potential for contravening
various laws. This article provides guidance on
how to ensure a related party borrowing arrangement fully complies with the key element
of keeping the arrangement at arm’s length.
Why bother?

The first question is: Why bother borrowing from a related party? Why not just borrow
directly from a bank? There are several key
reasons. The first is, it increases the wealth of the
family group. Consider the following case study.
Case study

Jack and Jill have $350,000 cash in their
SMSF. The SMSF trustee wants to borrow
$650,000 to acquire a $1 million property.
Banks are offering to lend to the SMSF trustee
at 7.5 per cent per annum. Jack and Jill own their
own home. Banks are willing to lend to Jack and
Jill at 6.5 per cent per annum. Accordingly, they
are considering two different options:
Option 1 - the SMSF trustee borrows the
$650,000 directly from a bank at 7.5 per cent
per annum.
Option 2 - Jack and Jill personally borrow the
$650,000 from a bank at 6.5 per cent per annum

Bryce Figot

(using their home as security) and then Jack and
Jill on-lend that money to the SMSF trustee at
7.5 per cent.
Make the following assumptions:
• Jack and Jill are each on a personal
marginal tax rate of 30 per cent;
• Jack and Jill each receive $25,000 of
concessional contributions into the
SMSF each year;
• the property increases in value by

7 per cent each year;
• the property yields a rent of 3 per cent
each year;
• all loans are interest-only; and
• in option 2, Jack and Jill would use the
interest received from the SMSF to
pay the bank.
The table below shows Jack and Jill’s position
after 10 years.
Accordingly, by engaging in a related party
lending strategy, Jack and Jill have increased their
wealth by almost $50,000 over 10 years. This
$50,000 is from the fact that the “SMSF loan
premium” of 1 per cent has stayed in Jack and
Jill’s family group. Naturally, the SMSF itself is
indifferent to where the money comes from - this
is of course because the related party borrowings
are at arm’s length.
It is important to note that the interest that
the fund pays to Jack and Jill will be included
in their personal income tax returns. However,
generally speaking, the interest expense on the
loan from the bank should be deductible to Jack
and Jill.
Accordingly, Jack and Jill do not receive any
tax benefit - in fact, Jack and Jill personally pay
more tax under option 2, but this is a happy
result of Jack and Jill receiving more net income.
OPTION 1

OPTION 2

Net wealth in SMSF

$1,363,640

$1,363,640

Net personal wealth (excluding value of home)

-

$48,506

TOTAL WEALTH

$1,363,640

$1,412,146

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Another key reason for opting for a related
party is administrative efficiency. Due to the
bureaucracy of large SMSF lenders, even if
everything is completely in order it can still take
many weeks before a property can settle. Some
SMSF trustees do not have the luxury of time;
related party loans can be implemented in a
fraction of the time (especially where the related
party is already cashed up and does not itself
need to borrow from a bank).
What does the ATO say?

The Australian Taxation Office (ATO)
acknowledges that it is allowable for related
parties to lend to SMSF trustees. They make the
following (non-binding) comments:

strategy can be allowable, but care must be taken
to cross the “t”s and dot the “i”s.
The test of arm’s length

It is vital that the terms of the loan be at
arm’s length. From a superannuation law point
of view, something is at arm’s length if a prudent
person, acting with due regard to his or her own
commercial interests, would have done it.
It is vital to bear this test in mind when
selecting a loan-to-value ratio (LVR) and the
interest rate. It is also vital to ask how you would
prove that this test has been met if audited by
the ATO. The best proof is a written offer from
a bank to lend to the SMSF trustee on the same
terms (that is, documented evidence that you
have benchmarked against what a bank would
offer).

Is an SMSF allowed to borrow
from a related party?

The law does not prohibit the lender from
being a related party. However, SMSFs must
continue to comply with other legislative requirements.
For example, the SMSF must satisfy the sole
purpose test and comply with existing investment restrictions, such as those applying to
in-house assets and prohibitions on acquiring
certain assets from a related party of the fund.
On-lending to an SMSF

Can a related party borrow on a full recourse
basis and on-lend the money to the SMSF
under a limited recourse borrowing arrangement
at a higher rate of interest?
Yes, provided:
• the limited recourse loan to the SMSF by
the related party is appropriately documented;
• the SMSF is not charged more than an
arm’s length rate of interest for borrowing;
• the arrangement under which the SMSF
borrows from the related party otherwise meets
the requirements of the super law.
Accordingly, the ATO highlights that the

Loan-to-value ratio

Theoretically, a prudent person, acting with
due regard to his or her own commercial interests, might lend with an LVR of 100 per cent.
However, in practice this would be very rare and
no doubt such lenders would charge a hefty interest premium. This would get an SMSF into a
catch-22 because, if a related party is charging an
SMSF trustee a hefty interest premium, then the
arrangement might alternatively be construed
as an early access scheme. Accordingly, from a
practical point of view, it’s best to stay within
the same LVRs that banks offer. As a rough
rule of thumb in respect of real estate, any LVR
less than 70 per cent is fine. An LVR between
70 and 80 per cent might be allowable, but the
SMSF trustee would definitely have to have
very strong evidence supporting this. Anything
higher than 80 per cent starts to be fairly “on the
nose”.

59

best practice is usually to benchmark against
what the SMSF trustee could have received from
a bank and retain written evidence of this.
The next question is how to describe the
interest rate. Consider the following different
options to describe interest rates:
• Option 1 - x per cent
• Option 2 - Division 7A benchmark
interest rate
• Option 3 - the lender’s cost of finance
• Option 4 - a rate agreed between the
parties from time to time
• Option 5 - Westpac’s variable home
loan rate
• Option 6 - RBA cash target rate
+ x per cent
Best practice is often to use the option 6
(that is, RBA cash target rate + x per cent).
Because the RBA cash target rate moves, the
SMSF loan’s interest rate will automatically
follow and should roughly approximate an arm’s
length rate over time (unlike option 1).
Assume that the “x per cent” in option 6 is
calculated so that the total of option 6 is the
same as what a bank is offering. In this case, it
is very easy to show that the interest rate was
indeed benchmarked, which of course helps to
prove that it is at arm’s length (unlike options 2,
3 and 5).
It is certain and easily observed by a third
party (for example, the SMSF’s auditor), years
after the relevant time period (unlike option 3,
4 and 5).
Borrowing from a related party can significantly increase clients’ wealth. However, it is important that the key elements in a related party
loan - such as being at arm’s length - are properly
handled. With proper planning and due care,
this is a straightforward process.

Interest rates

Interest rates should reflect the fact the loan
is of a limited recourse nature, and thus a risk
premium on the interest is charged. Again, the

Bryce Figot is a senior associate at leading SMSF
law firm DBA Lawyers - www.dbalawyers.com.au

Who do you turn to for expert advice?
Having provided solutions to the SMSF industry for over 20 years, Macquarie knows self managed super inside out.
If you’d like to be on top of the latest market developments and legislative changes, our technical team are industry experts.

Take me to your leader
The industry body you choose to represent you says a lot to your clients about who you are and what you
stand for. Martin Mulcare explains

T

he importance of selecting a suitable
person to represent your interests is
very topical after the federal election. It is also
the theme of the cover story for this edition. I
might re-frame the challenge: Who is the most
appropriate body (or person) to represent your
interests as a financial adviser in Australia?
There is a virtual industry built on the concept of leadership. And yet it is fascinating that
there is little attention given to the criteria one
might apply to selecting a leader or a representative. Why is that the case? Perhaps the prevailing
culture is focused on becoming the leaders rather
than selecting them. Perhaps it doesn’t suit
special interest groups to define generic qualities when it is easier to pitch short-term gains.
Perhaps there is a risk of insulting people if one
has the temerity to provide some guidelines on
what to look for in a leader or representative. I’m
going to take that risk in this column.
What is important to you when choosing a
person (or body) to represent you as an Australian financial adviser? One obvious criterion is
“what’s in it for me (WIIFM)?” It is traditionally
the belief of political parties that this is the main
consideration for voters. The offers might vary
from party to party and election to election but
the permanent feature of election campaigns has
always been “pork barrelling”, or appealing to the
“hip pocket nerve”. In the same way, particularly
at a time of legislative change, your potential
representatives may pitch for your support by
promising short-term wins, like campaigning
against proposed restrictions on commission
payments.
I hope that you agree that temporary gains
are not the only valid criteria for making your
choice. So what else might you take into account?
One important criterion that you might
consider is character. What do you know about

Martin Mulcare

the qualities of the person you are considering? Do you really trust them to represent your
interests? The cynicism of the electorate has
meant that politicians have not put much effort
into establishing their credentials in terms of
character. I would like to think that in a smaller
community, like the financial advice industry,
that one could make some assessment of character. Have you met them? Do you know someone
who has worked with them? What does their
track record indicate? Ideally your representative
would share some of your personal values.
For me the most important factor is alignment of long-term interests. In other words,
what is the path that this person is intending
to lead me along and is that the best path for
me? This is similar to the WIIFM appeal but is
based on long-term alignment, not short-term
wins. It is also related to the consideration of
character, because you need to think about
whether you can trust them to deliver the long-

term promise and/or stick to their espoused
path. However, this is really a different consideration altogether. And it’s a difficult one to apply
because the foundation question is difficult:
What is the best long-term path for you?
I would encourage each reader to think
about this question. I expect that individual responses may vary but here are some core beliefs
that my clients share:
• I want to be part of a respected profession;
• I want an environment that makes it easy
to provide valuable advice;
• I want to work with institutions that
support my desire to help people achieve what is
important to them;
• I want to be able to quote fees that I am
happy to explain (and that my clients are happy
to pay);
• I want to work with talented and motivated people.
If you share these long-term interests then
perhaps you should be asking your potential industry representatives whether they share these
interests - and what they will do to deliver them.
And why stop there? What other “leaders”
do you select in your business life? You may wish
to apply the same considerations when selecting
them, too. I would also suggest that when you
are selecting a subject matter expert to work
with (for example, an estate planning expert or a
tax expert) that you look beyond their technical
skills and assess both their character and their
alignment with your desired future.
These are the best of times to find somebody
(or a body) to represent and deliver your longterm interests.

Martin Mulcare can be contacted on
martin@scat.com.au

P R ACT I CE M AN AG EMENT

61

Client reviews shouldn’t be opt-inal
Rod Bertino says planners who already run an effective client review process should not be concerned about one
of the proposed regulatory changes

L

ike most participants in the
financial services profession, we have been intently following the opt-in/opt-out debate that
has raged since Minister Bowen
released his Future of Financial
Advice discussion paper earlier this
year. While the final form of this
element of the reform package is
still very much unknown, it did get
us thinking about the importance
of client reviews and the current
state of play in the Australian
marketplace.
As the following extract from
our recently released Future Ready
IV white paper clearly shows, fewer
than one in two Australian advisory
practices achieved a “Fit” rating
in the area of client reviews; and
what’s more, there has been only
marginal improvement over the
past few years.
This is especially surprising
when you consider the impact the
review process can have on practice
profitability. One of the key findings arising from the Future Ready
IV research was that, on average,
the principals who had taken steps
to address this issue were generating 145 per cent more profit than
those who had not yet formalised
their client review processes.
So, given
a) These profitability findings prove that it makes good commercial sense to regularly meet with
clients and review not just their
investments or product holdings,

but also their life situation; and
b) The review service is such
a critical element of any ongoing
service offer, and an opt-in regime
as outlined in the proposed Bowen
reforms could well see practice remuneration more directly linked to
a client’s satisfaction with the offer,
intuitively we would think that
going forward many advisers may
be:
i) Far more diligent in
scheduling and conducting reviews;
ii) More focused on ensuring the review process meets their
client’s expectation (currently fewer
than one in three advisers have a
structured approach to seeking
client feedback - so the potential for
disconnect is enormous);
iii) More aware of the real
cost to deliver the review service
and hence the fees they charge their
clients.
So with this increased focus
on reviews, we thought it would
be of value to share with you what

the 40,000-plus clients who have
completed our CATScan satisfaction survey have told us about the
services being delivered by their
adviser and, in particular, their
review process.
While many practices have
invested countless hours examining
the various elements of their review
procedures and agonised over the
content and layout of their review
reports, clients continually tell us
advisers often lose sight of what is
most important - the client! We
hear all too often from clients that
while their adviser is very good at
investment updates and product
evaluations, in their mind, this does
not equate to a client review.
First and foremost (and at the
risk of stating the obvious), in the
client’s eyes, a client review must be
centred on the client. It should be
all about them - their family, their
business, their goals, their dreams
and their aspirations. While their
money and their policies are obvi-

ously important, they should not be
the sole focus of the review.
While there is no one “right”
answer that is guaranteed to work
with every client and in every practice, there are a few common attributes we see in successful practices,
as detailed in the breakout box.
While undoubtedly there will be
changes made to the proposed reforms, regardless of the final details
of any opt-in or opt-out provisions,
perhaps these tips will add value
as you consider your client review
process and prepare your business
for July 2012 and the implementation of the new regime.

Rod Bertino is a partner and director
of Business Health www.businesshealth.com

62

P R A CTI CE MANAGEMENT

Expect
only the
unexpected
With so many pundits predicting
recession, Peter Switzer says it’s
unlikely to happen

R

egular readers might recall that as a response to excessive negative reports on
mainstream media over 2008, when the global
financial crisis (GFC) was taking out the likes
of Lehman Brothers, I created a “Good News
Daily” section on our website - www.switzer.
com.au.
With my media mates being lured into the
latest opportunity to spook ordinary Australians with constant references to a double dip
recession in the USA, and a recent ABC “Four
Corners” report suggesting that we were simply
awaiting another market crash and severe recession, I thought it was time to put the other side
of the argument.
By the way, the ABC program, which was
sourced from overseas - which means we can’t
blame Aunty’s journalists, only their programmers - did zip to canvas the other point of view.
Financial planners’ clients could have been
easily worried by the warnings that were made
in this program. I know I received a few emails
from readers/viewers; but for my clients, I
headed it off at the pass in my daily column on
my site.

The reality is that a consensus of US economists expects a slowdown, but not a double dip
recession.
There are those who argue it’s a 25 per cent
chance of a double dip recession, but the general
view is that we are looking at a slowdown. And
the first week in September - historically the
worst week for shares - was a great start to proving my case.
In that week, the S&P 500 Index put on
around 3.75 per cent and pushed through an important resistance level. The market drive came
from a better-than-expected US jobs report,
where unemployment rose from 9.5 per cent to
9.6 per cent, but the rise in private employment
was better than expected.
Earlier in the week, there was much better
manufacturing news than economists tipped,
with the ISM manufacturing data raising doubts
over the credibility of the fear mongers and
double dip claims.
Then China kicked in with another betterthan-expected Performance of Manufacturing
Index, and global stockmarkets were off to the
races. Meanwhile, the Aussie economy registered

a strong June quarter economic growth number
- up 1.2 per cent. So, there are few economic
worries at home, given our strong links to China
and India.
Hot on the heels of this manufacturing data
came the latest retailers’ sales figures in the USA,
which were better than expected in August. On
that day, the consumer discretionary sector rose
around 1.8 per cent on the New York Stock
Exchange.
Not bad for an economy heading for a
double dip recession.
My feeling is that the US will avoid another
recession and will experience slow economic
growth and then slow growth in stock prices until the balance sheet health of major companies
results in jobs being created. This will power the
US economy and then Wall Street.
On my program on Sky News Business
Channel, former ANZ chief economist Saul
Eslake said investment-led recoveries are slow to
spill over to jobs, but eventually it happens.
We have an investment-led recovery in the
USA, and that’s why they should avoid a double
dip recession, but it is also why the stockmarket
will have ups and downs until the doubting
Thomases become “boom boom Bobbies”.
When Anton Tagliaferro, the founder of Investors Mutual, appeared on my program, he put
forward a view that I thought had relevance for
anyone arguing that we should avoid a crash and
burn of the stockmarket and the US economy.
He says the US is not out of the woods and
will be in a “bit of strife for a while”.
On whether there will be a double dip, however, he makes the following point: “A collapse
usually comes when you don’t expect it, but right
now there are a lot of people expecting it.”
That’s a great point.

Triple dip just not on the cards
There can’t be a triple-dip recession if we haven’t even had a single-dip recession; but if there is,
says Ron Bewley, you read it here first

A

t the beginning of this
year, the term “double dip”
had almost left our lexicon. But
now it is back in spades. Investors
are worried, and those sidelines are
brimming with cash.
I show the harsh reality of the
US recession (recall that we haven’t
even had one dip) in Chart 1, from
the 2007 November peak to the
most recent (at the time of writing)
May figure.
US GDP fell 4.1 per cent to the
low of May 2009, but has climbed
back 3 per cent since. There’s only
1.3 per cent to go to get back to
the top, but it would only take one
negative quarter - not a return to
the depths of last year - to have
a double dip. Not good, but the
media hype paints it as the end of
the world.
It is important to understand
the psychology of forecasting to
really understand how we got so
excited about dip counting. In the
academic literature there is the
concept of “rational cheating” in
forecasting: it often pays the forecaster to not reveal his or her true
expectations. For example, if every
other forecaster predicts the market
will end the year in a range of 4800
points to 5000 points, and you
think it will be 6000, there is little
to be gained by telling your version
of the truth. State your forecast to
be, say, 5200, and you still get all the
upside. If you are wrong, you are

Chart 1: US GDP in Recession

Source: Woodhall Investment Research

not too far from the pack.
Of course the “herding instinct”
of forecasters has already put the
forecasts in too narrow a range,
given market volatility.
So now to dip counting. No one
I listen to is actually saying there
will be a double dip - just that there
is an increased chance of one. And
every forecaster I know puts that
probability at well less than 50 per
cent. So “for free”, every forecaster
can throw in some probability of
there being a double dip without
ever risking being found out!
There either will be a double
dip or there won’t. With only one
outcome, we can all say, “I told you
so”, because we have covered both
bases. Only with repeat forecasts
can such a probability be assessed
as being accurate. My question is:

How many forecasters have thrown
in a double dip just so they can’t be
wrong? Of course no one should assign a zero probability to a possible
event, but why all the smoke and
mirrors?
There seems little doubt that
the US has a long way to go to get
out of its economic mess. It will
be tough. But it doesn’t matter if
we get one tiny negative quarter
growth or a tiny positive one. There
is no (very) good news likely to
come from the US anytime soon
and that has been priced in.
Australia is not as dependent
on the States anymore. Even their
president keeps cancelling trips
here. China is the bigger game in
town, and they look great. Some
say China is slowing down, but the
world asked them to do that at the

start of 2008 - 10 per cent to 12
per cent growth was not sustainable; 8 per cent should be the
target! When we get what we asked
for, the double dippers cry: “It’s a
slowdown!"
Australian investors should
always be ready for the unexpected,
and that is called risk management. Always basing decisions on
the outside chance doesn’t help
investment performance. Interestingly, my interpretation of broker
forecasts has the market producing
an average of only 11 per cent total
return for the 12 months ahead down 2 per cent or 3 per cent over
the August reporting season. To
me that means expectations have
been sharply revised down because
of double dip fears. And when the
fears abate, companies will find it
easier to beat expectations and the
market can jump up.
So why a triple-dip forecast?
The main aim of most forecasters is
to be noticed! Without a double dip
there can’t be a triple - but if there
is, I can claim to be the first to have
predicted it.

Ron Bewley is executive director of
Woodhall Investment Research www.woodhall.com.au

64

M A N A G ED F UNDS

Private equity - here be dragons
Dug Higgins says portfolio construction and asset allocation have been put through the wringer over the past two
years, throwing more focus on alternative asset classes as a way of increasing the robustness of portfolios

P

rivate equity (PE) has developed into
a major component of the alternative
investment universe, and is now broadly accepted as an established asset class within many
institutional portfolios, as well as becoming more
accessible to retail investors.
Private equity, when properly understood,
can act as a useful diversifier in a well distributed
portfolio and can provide access to substantial
absolute returns. The trick for the average investor or adviser is gaining that understanding.
The very nature of PE as an asset class means
that transparency is limited, compared to other
asset classes. And the potentially significant
rewards come at the expense of challenging risks.
Like many of the alternative asset classes, the
role and characteristics of PE are still not well
understood in retail markets. This is particularly
the case when using direct funds, which tend
to be the domain of institutional investors, as
opposed to the fund-of-funds (FoF) approach,
which is more common on the retail side. This
article will hopefully shed some light on both the
positive aspects and dangers of direct PE funds.
As with all alternatives, the key reason for
investing in private equity is to improve the risk
and reward characteristics of a portfolio. Investing in direct PE funds offers the opportunity
to generate high absolute returns whilst aiding
portfolio diversification. There are, however,
significant challenges involved for retail investors
and advisers in selecting the right PE investments. Unlike the FoF approach, risk concentration is obviously significant at both the manager
and asset level. This means correct investment
selection is vital.
PE involves systemic asset class risk as well
as investment-specific risk. This should be recognised in an industry where the high standard

Dug Higgins

deviation of returns is at least partly driven by
the concentrated nature of direct PE funds,
which typically invest in fewer than 15 companies. While this suits the strategies of most PE
managers in terms of focusing their expertise,
underperformance or failure of investee companies will obviously have a greater impact.
The returns driver in PE is the capacity to
create value through the operational enhancement of an invested business. This needs the
correct combination of experience and process
by managers who have a repeatable formula for
value creation; rigorous due diligence processes
that yield proprietary insights; a proven model to
recruit, retain and motivate management teams;
access to specialist deep sector knowledge; and a
strong proprietary deal flow.
While such funds also tend to benefit from
leverage, it is not leverage alone which drives

â&#x20AC;&#x2DC;Like many of the
alternative asset
classes, the role
and characteristics
of private equity
are still not well
understood in retail
marketsâ&#x20AC;&#x2122;
success. Research has shown that approximately
two-thirds of value generation is derived from
operational enhancements in investee companies
and one-third from the use of fund leverage.
Therefore, while financial engineering is part of
the equation and plays its part, the only sustainable source of driving returns in PE is increasing
enterprise value.
Accurate fund selection, however, remains
challenging due to a shortage of data, long-term
illiquidity, limited benchmarking ability and lack
of an industry beta. These issues all combine to
make manager selection more of an art than a
science. This in turn ups the ante for investors
because, in PE, selection of the right manager
is all that really matters. This is particularly
relevant because, although PE is frequently
portrayed as an asset class that generates significantly higher returns, the truth is that, on aver-

M AN AG E D FU N D S

age over the longer term, direct PE
funds seldom beat public equities.
However, all is not lost. Topperforming funds do provide substantial outperformance over public
equities. Global research sources
have shown that over the long
term, top-quartile PE funds tend
to generate about 500 basis points
of outperformance over local public
equity benchmark indices.
By comparison, the performance of the average PE fund is
either less than or about the same
as public equity indices, which reinforces the fact that direct PE funds
typically display a statistically huge
dispersion in performance between
the top funds and the rest of the
pack. This has obvious implications in an asset class which should
generate a robust risk and illiquidity premium to make investment
worthwhile.
Manager selection is still not
easy, however. One of the oftquoted attributes in assessing PE
as an asset class is the concept of
positive performance persistence.
Unlike most other asset classes,
the phenomenon of performance
persistence in PE managers is a
documented reality. Persistence has
obvious implications for portfolio
construction, as long as investment
discipline and management are constant. However, while performance
persistence is useful, investors need
to be careful not to make inappropriate investment decisions based
on its expectation, as it is relatively
imperfect.
The issue is further muddied
by recent studies of performance
claims made by PE managers over
a 20-year period, which showed

that two-thirds claimed “top
quartile” performance. While this
would normally (and rightly) raise
eyebrows, it is as much a symptom
of the state of imperfection in performance benchmarking in the PE
industry where managers can select
the benchmark of their choice, depending on dataset and vintage year
(when the fund was created).
However, this means that
investors should be wary of the
lure of “top quartile” performers, as obviously being in a top
quartile somewhere is not necessarily a meaningful criterion for
assessing the quality of a manager.
Such benchmarks are necessarily
constructed using funds that tend
to be highly heterogeneous due to
size difference, strategies employed,
management styles and vintage
years. Without some significant
refinement in the future, it is difficult to make meaningful ongoing
comparisions.
When dealing with direct PE
funds, asset allocation also needs
to take into account several issues.
While having diversification attributes, the ability to accurately
judge the true correlation between
PE and public equities is far from
straightforward. It obviously has
some positive correlation attributes,
because public and private markets
remain equity linked, but the correlation is not direct and the effect
of valuation lag in assets can have a
significant effect. Like investments
in direct property, the impact of
valuation lags has the potential to
artificially mask “true” standard
deviation of returns, which has
implications for asset allocation
strategies. At the very least, PE is

not strongly correlated to public
equity, but it would rarely have a
negative correlation over the longer
term.
However, the net effect to
investors remains the same: this is
an asset class where an allocation
should only be made if investors
believe they have the ability to identify (and gain access to) managers
likely to be the top performers. Due
diligence on manager track record
is paramount and often extremely
difficult in the retail space given the
requirement for understanding how
returns have been generated and
what is being measured.
Private equity remains an asset
class which can be an excellent
contributor to performance when
done correctly and can offer aboveaverage returns. However, it is not

65

an asset class that will be suitable
for all retail investors and should
be approached with a high degree
of caution. Sufficient due diligence
to unearth top managers is vital to
take advantage of the high absolute
returns that the asset class is capable of generating.

Partnership and Financial Planning opportunities
available in our growing holistic advice partnership.
Fantastic support including Client Appointments and
comprehensive Para Planning/ Administration offered
in a fun professional environment as we evolve into
a Fee for Service model as Trusted Advisors. Ideal
for sole practitioners keen to retain control but get
benefits of scale and strong support off lower cost
base.
For further information please contact

Gary Scallan
garys@quantumplanning.com.au
07 5509 8999

66

P R O P ERTY

Prosperity, not austerity, is our
real problem
The horse has bolted, and now regulators are shutting the stable door. Frank Gelber asks: How do we get the
horse back into the stable?

C

ompared with the rest of the world,
Australia certainly has had a soft landing after the GFC-induced shock. The muchfeared recession never eventuated. Unemployment peaked below 6 per cent.
That should come as no surprise. The
situation facing Australia when the GFC hit
was quite different from that in the rest of the
developed western world. Even if we’d had a
recession, it would have been a short-and-sharp
collapse, a confidence-induced phenomenon,
rather than anything fundamental. Indeed, it was
precautionary saving that caused the Australian
downturn.
Strong Government expenditure and handouts cushioned the outcome. And it’s a return of
confidence that’s driven the recovery. Australia
is now well into a recovery phase that will build
momentum over the next few years.
By comparison, the US, the UK and parts of
Europe had significantly overinvested. The falling asset values, which underpin much of bank
lending, caused significant debt write-offs. They
had a fully-fledged financial crisis, with economic
outcomes exacerbated by a collapse of confidence
and spending, and now face a long hard haul out
of severe recession. They’re doing what we did
in the 1990s, only worse. They face long periods
of weak investment as they absorb the excess
capacity created during the boom. Meanwhile,
Government spending will be constrained as

‘There is no point
looking at the GFC
as the beginning, as
an isolated shock. It
wasn’t’
they attempt to cut the budget deficits created in
an attempt to cushion their economies. It’ll take
the US a decade or more to get its unemployment rate back down to 4 per cent. This is not
a matter of a quick rebound. For much of the
western world it’s a slow rebuild.
There is no point looking at the GFC as the
beginning, as an isolated shock. It wasn’t. The
GFC itself was caused by the excesses of the
preceding financial engineering (FE) boom. It
was an unwinding of the excessive gearing, the
overvaluation in the overinvestment leading to
oversupply caused by the FE boom.
Australia, too, went through a FE boom, but
it wasn’t as advanced. The FE boom left Australia over-geared and, with the resultant weight of
money, overvalued. But not overinvested. Had
the cycle run its course, we would have oversup-

plied markets, but we were too slow into the
game. In that sense, the GFC did us a favour,
curtailing investment before we had a chance to
oversupply.
For investment markets, of course, the three
Os - overgearing, overinvestment, oversupply constitute the major element of market risk. The
first two can be solved with a financial market
correction, and that’s what has happened in Australia. The third is more difficult and takes longer
to unwind, and that’s what is happening in many
other developed economies.
In Australia, the GFC triggered a correction,
removing the above three elements of market
risk. Market risk is now low, not high. With limited bad debts, Australian banks remain strong.
We had a credit squeeze, not a financial crisis.
Yet debt and equity markets are both supersensitive to perceived risk, affecting financing and
constraining recovery.
The banks still want to reduce exposure to
risk, and particularly to property, even at now
much lower gearing levels. And the regulators are
stress testing for another one-in-20-year event.
That doesn’t make sense. We’ve just had the
one-in-20-year event, and the preconditions that
caused it are gone. Meanwhile, for small business
and property markets, rationing and high cost of
funds is creating a substantial difficulty.
In equity markets, the flight to fixed interest
is understandable - but not sensible - in behav-

P R O PERT Y

The bigger risk is underinvestment, not overinvestment

ioural terms, with no one wanting to stick their
neck out and take a position.
Again, the GFC correction reduced market
risk - it is now low, not high. The horse has
bolted and they’re shutting the stable door, effectively preventing it from coming back in. Gearing
has come back to reasonable levels. Prices are
no longer overvalued. And, with the collapse of
development finance, the risk is of underinvestment, not overinvestment. Both debt and equity
markets are misreading risk.
Some might argue that delaying recovery by
constraining finance is, given the strength of the
economy, a good thing. I would disagree. The
current underinvestment, and the shortages that
it will cause as demand recovers, is just setting us
up for the next boom.
Meanwhile, the Australian economy has
rebounded. Employment has grown strongly,
boosting household income. Consumers have
regained confidence but remain cautious on
expenditure, careful about again letting go of
the purse strings. They will spend more as the

‘To me, asset
markets present an
extraordinarily lowrisk, high-return
proposition’
recovery proceeds. Private investment remains
weak, but will now start to recover. The residential recovery has begun. Buoyant minerals prices
and profitability have sustained mining incomes
and expenditure, with the next round of minerals
projects set to boost activity. Non-residential
building will be slower to recover, with financial
constraints, plus a hangover of the GFC-induced
price correction, leaving prices below replacement cost levels. But solid demand in the face of

67

leasing market shortages will drive up rents and
underwrite the next round of building. As public
investment winds down, the private sector will
take over as the engine of growth. The momentum of the Australian economic recovery will be
underwritten by rolling investment cycles.
Meanwhile, the financial markets are still
being driven by overseas conditions. Day-to-day
movements in sharemarkets follow the US lead.
Yet the prospects are quite different. In the press,
and in commentary on the economy, fear rules.
Fear of sovereign debt problems. Fear of a US
double dip. How do those problems affect Australia? The answer is - very little. Australia is an
Asian economy now. Exports into Asia are heading up towards 80 per cent of total. And Asia is
strong. At some stage, both financial markets and
economic commentary will have to disconnect
from the US.
For Australia, the medium-term outlook is
strong. We’re looking at growth averaging 3.5 per
cent over the next five years.
Our problems will be problems of prosperity rather than austerity. It won’t be long before
capacity and labour constraints in the face of
solid demand lead to demand-inflationary pressure and tightening monetary policy. For asset
markets currently underinvesting, that means
tight supply, rising incomes and capital growth.
There are risks, but they come later. The next
five years of solid growth are pretty much locked
in.
To me, asset markets present an extraordinarily low-risk, high-return proposition. And
my pick of markets is commercial property. I
can’t remember a time, not even at the depths of
the 1990s recession, when property was a better
prospect.

Dr Frank Gelber is director and chief economist of
BIS Shrapnel.

68

P R I VATE BANK ING

The value of advocacy in acquisition
Alan Shields says private banks, slow to recognise the power of advocacy, are now starting to catch on

M

any of the largest financial institutions in Australia currently use
advocacy (in some form) to measure their
performance. To date, private banks have lagged
this trend but are beginning to realise the power
of advocacy and are catching up.
If one analyses the private banking
relationship, it becomes clear that advocacy that is, being recommended to others by your
clients - is important from the very beginning.
Even “unbanked” high-net-worth individuals
(HNWs) - those with no private banking
relationship - place a lot of value on advice
from family and friends. This can be seen in the
large number of private banking relationships
that started with a referral from a friend or
colleague; and APBC research from March 2010
shows that word-of-mouth is a strong tool for
acquisition.
In fact, 16 per cent of private bank clients
cite “recommendation from a friend or colleague”
as the primary reason for becoming a client of
a private bank. A further 12 per cent said they
were given a “recommendation from another
service provider”. It is therefore important for
private banks to analyse what motivates their
clients to recommend them, and the reasons
for lack of recommendation or - importantly negative word-of-mouth.
When examining what drives private
banking clients to “promote” their bank, we need
to look at the correlation of advocacy scores
(likelihood of recommending their private bank)
to satisfaction with a private bank and with a
relationship manager (RM). When analysing
correlation coefficients, the closer the value is
to +1.0, the stronger the positive correlation is
between the two variables.
Both overall satisfaction and satisfaction
with RM are highly correlated to advocacy,
although satisfaction with the institution is
slightly more highly correlated than that for

RM satisfaction. The results clearly show that
providing a quality service that satisfies the client
is the first step in effectively driving advocacy.
Barriers to advocacy

It is clear that satisfaction is important when
you look at the reasons private banking clients
are unwilling to recommend their private bank.
There are essentially two main reasons for this
unwillingness: either they think it would be
inappropriate or they are unhappy with the
service.
While it may not be possible to overcome
clients’ feelings of the inappropriateness of
recommending a bank, it is certainly possible
to improve satisfaction; and this is what private
banks need to focus on.
Driving advocacy

The question is: “If satisfaction leads to
advocacy, what attributes can private banks focus
on to drive advocacy among their clientele?”
Analysis of the correlation between satisfaction
with various attributes of the private banking
relationship and advocacy provides a better
understanding of what drives private banking
advocacy.
The strongest drivers of advocacy revolve
around personalised service - “the level of service
received” and “understanding your financial
needs” were the top two drivers of advocacy.
Providing the right service is crucial in driving client satisfaction and advocacy, and key to
that is asking questions in order to understand
clients’ needs.
The investment returns and pricing of
products and services were the next most
important aspects of a private bank’s offering,
reflecting HNW concern about the value of a
private banking offering. Strong service backed
up by good investment returns is likely to lead to
advocacy.

While “invitations to events” are the least
correlated to advocacy, these events can add a
“wow” factor that may attract unbanked HNWs
to a private bank. Private banking clients in focus
groups show interest in invitations to events
and other “rewards”. While they might not drive
clients to recommend, they are likely to be attractive to prospective clients.
When the influence on advocacy of different
service attributes is plotted against satisfaction
with these attributes, it is clear that private banks
are underperforming in key areas. For attributes
that are very influential in driving advocacy, the
ideal satisfaction score is between four and five
out of five. If clients are satisfied with these attributes, they are likely to recommend the bank.
The only attribute which had a mean
satisfaction score greater than four was “confidentiality”, which was unfortunately not strongly
correlated to advocacy. Further, the four attributes that are likely to greatly affect advocacy all
received a score lower than four out of five. Of
these, “the level of service received” had the highest satisfaction, while “the pricing of products
and services” had the lowest.
Focusing attention on delivering these four
attributes is likely to increase client advocacy and
have a positive effect on acquisition. A simple
first step in increasing satisfaction in these areas
is to have a conversation with clients around
their needs and expectations. This will enable a
bank to deliver tailored service that meets client
expectations, as well as to better understand the
financial needs of clients. Understanding clients’
financial needs can flow on to improved delivery
of investment returns and pricing, and a conversation with clients will enable the bank to ensure
expected risks and returns, as well as pricing
structures, are transparent.
Alan Shields is research director for Retail Finance
Intelligence (RFI) - www.rfintelligence.com.au

P HI LANT H R OPY

69

Ancillary service inspires giving
A new service aims to support planners who have clients with strong philanthropic leanings.
Simon Hoyle reports

T

here were an estimated 175,000 highnet-worth individuals (HNWIs) in
Australia at the beginning of 2010.
The 2010 Merrill Lynch/Capgemini World
Wealth Report (WWR), which tracks the
fortunes of the world’s richest investors, says
that the combined wealth of Australia’s HNWIs
increased by almost 37 per cent during the
year, from US$379.8 billion ($433.6 billion)
to US$519.4 billion. The average wealth per
HNWI reached $US2.99 million, or just more
than $3.4 million, during 2009.
And yet, Private Ancillary Funds (PAFs)
number fewer than 800. PAFs are a vehicle that
came into existence in 2009, to make the task
of structured giving far simpler to set up and
maintain.
The lack of take-up of PAFs among wealthy
individuals is something of a mystery; but one
reason put forward is a general lack of understanding of the funds and how they work among
the principal advisers to HNWIs - including
financial planners and private bankers.
Social Ventures Australia (SVA), a nonprofit organisation established with the aim of
developing philanthropy in Australia, has set
up a PAF advisory service to support financial
planners who have clients interested in setting
up a formal structure around their philanthropic
activities.
Planners who are already familiar with selfmanaged superannuation funds will find many
of the concepts associated with PAFs familiar.
They’re structured as trusts; they must have trustees; they must be efficiently administered (and
audited); and there must be formal investment
and giving strategies in place.
Rachael McLennan, manager of SVA’s
PAF service, says the recommended minimum amount needed to set up a PAF is about
$500,000. The average size of the roughly 800

PAFs in Australia is about $3 million, and the
largest single PAF is $300 million.
The SVA PAF service is designed to be provided either directly to the client, or to the client
via a financial planner.
“It provides a bit of a one-stop shop, and you
can add or subtract elements as you feel comfortable,” McLennan says.
“You’d sign up to one of our workshops.
That’s half a day, and we’d go through every element relating to a PAF, explain it all to you and
then offer you the bits - if you have clients that
want establishment and ongoing administration;
if you have clients who want an audit done; if
you have clients that want a grant-making strategy written and evaluated; and each of those can
be sectioned out and charged for accordingly.”
McLennan says SVA is “currently working
on structuring packages for financial planners, so
two or three financial planners could come in at
once, or 10 or 15 financial planners could come
in at once, the cost is X and they get telephone
and e-mail access to us for 12 months”.
SVA advises planners to focus on the “inspirational” aspects of PAFs, and then encourage
clients to focus on the real and quantifiable differences a properly-structured program of giving
can make to the recipients. Part of the service
allows a planner’s clients to spend an hour on
PAFs with two experts.
“It’s an hour and it’s a really detailed presentation that focuses on ‘inspiration’, and that’s with
[SVA directors] Chris Cuffe and David Ward
- David wrote the handbook on these things for
Philanthropy Australia. We’ve cherry-picked the
PAF gurus.
“This hour is a free chat around PAFs, but
it focuses really heavily on the inspiration, and
that’s a cognitive decision made, because we felt
that if you were in a position to be doing something philanthropic, and you’d heard about PAFs

but weren’t sure where to start, and you went
to your financial planner, they might provide
information that was quite heavily based around
compliance and taxation, which might frighten
the pants off you and you might run a mile.
“So the complimentary one-hour chat is all
about inspiration. It just talks about benefits and
family involvement and simplicity and how we
can take the workload burden from you.
“Some people may come to that meeting
with their husband or wife, or with their kids
who might become trustees, or even with their
financial planner - if the financial planner hasn’t
come directly to us.”
McLennan says it’s “in our best interests” to
respect the relationship that a financial planner has with a client, and to “perhaps provide
support to the financial planner around their
investment strategy”.
“There are three parts to establishing and
running a PAF, and the first part is all around the
administration,” she says.
“If the financial planner didn’t feel they had
the expertise to carry out the administrative
tasks, SVA could do that, and it would cost the
client $5000 a year. I’d then assume the second
part - the investment part - would be left to the
financial planner.
“But the third part is the grant-making
strategy. That might then come back to us. The
adviser could be party to the conversations, so
everyone learned about grant-making as we go
along.”

70

The Fi n al Word

He’s called Charlie! And he’s got
big knives!
As the 2010 election result was being decided, Dixon pondered some weird and wonderful elections held overseas

T

hanks to the editor’s preoccupation
with early deadlines, at the time of
filing this column I didn’t know who had won
the 2010 Federal election. Depending on what
source you relied on, the seat count was either
72-71 in favour of Labor, or 72-all, or 72-74 in
favour of the Coalition. One thing most pundits
could agree on, however, was that it would be
some time before the result was clear. Some
unedifying horse-trading was in progress, and
the undecided independents were beginning to
outstay their welcome.
So instead of producing a pithy and enlightened insight into how the election affects the
financial services industry, and financial planning
specifically (as requested by the editor), I’ve
decided to make jokes about other countries.
In terms of electoral colour and drama,
we’re simply rank amateurs. Look at Brazil, for
example. (I am indebted to The Times’ “The
Bugle” podcast for alerting me to this particular
election, and to The Telegraph of the UK for its
outstanding reportage.)
In 2008, more than 200 candidates in local
government elections changed their names to
Luiz Inácio Lula da Silva, who was then Brazil’s
president and had a popularity rating of 80 per
cent.
That’s a bit like a candidate for your local
council changing his name to Julia Gillard. Who,
exactly, do you think it might fool?
Employing a variation on the same ruse, a
number of Brazilian candidates changed their
names to Barack Obama. This I found particularly puzzling; presumably success under this
cunning plan depends on voters genuinely believing that the President of the United States of
America might contest a Brazilian local government election.

Dixon Bainbridge

The logical flaw in this plan is that even if
you live in Brazil, you’ve either heard of Obama
or you haven’t. If you haven’t, then his name
would not encourage you to vote for him; and if
you have, it’s a fair bet you know who he really is.
Of course, every candidate wants to stand
out from the pack, and the Brazilians do it like
no other nation (or none other that I could find
easily). There was a Bill Clinton running for
office, along with a localised version of another
former US President, Jorge Bushi. There was a
Chico Bin Laden, and a DJ Bin Laden (garnering the Muslim hip-hop vote, I’m guessing).
There was the truly sinister-sounding Charlie Big Knives (Why? Cos he’s called Charlie!
And he’s got big knives!), and several that must
surely have lost something in the translation:
The Second King of the Prawns; The German
in the Lorry; Elephant Without a Tail; Kung Fu

Fatty.
At least Brazilian elections are strange in a
colourful way - much like the nation itself. US
elections are strange, too, but in the way that
only something that’s too complicated to understand can be. But in 2000 they staged an election
that was odd for a whole bunch of different
reasons. The Washington Post reported:
“Something very strange happened on election night to Deborah Tannenbaum, a Democratic Party official in Volusia County. At 10
pm, she called the county elections department
and learned that Al Gore was leading George
W. Bush 83,000 votes to 62,000. But when she
checked the county’s Web site for an update half
an hour later, she found a startling development:
Gore’s count had dropped by 16,000 votes, while
an obscure Socialist candidate had picked up
10,000 - all because of a single precinct with only
600 voters.”
And we all know what happened next: Al
Gore went on to invent global warming.
Of course, we are capable of a modest degree
of pottiness right here at home. I’m particularly
fond of the theory that says the swing against
Labor in Queensland was a backlash against
how the party treated the former Prime Minister, Kevin Rudd. That’ll show them: We’re so
loyal to Kevin that we’ll throw his party out of
government.
See what we did for you there, Kevin?
Kevin?

Dixon Bainbridge, Professional Planner’s resident
amateur psephologist, can be contacted on info@
conexusfinancial.com.au

6 BILLION
REASONS WHY
COMMISSIONS
SHOULD BE
AXED.
Over the last four years, financial planners have been paid $6.5 billion in superannuation
commissions, according to Rainmaker Research.* That’s a lot of money. And consider this.
Together, fees and commissions can add up to a year’s salary over the working life of an
average wage earner. You’ll find all the facts in Supernomics, a special research report
produced by Industry Super Network. It exposes the market failure within Australia’s
superannuation system, and also offers ways to address them. To download a free copy,
go to industrysupernetwork.com/supernomics
Rainmaker Consulting, Commissions Revenue Report, April 2010. www.industrysupernetwork.com/document-library/publications
* Commissioned by Industry Super Network, a division of Industry Fund Services Pty Ltd ABN 54 007 016 195 AFSL 232514.

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